How one does this requires careful consideration of the costs, tax consequences, and control in ensuring it is spent appropriately. Striking this balance can be achieved with careful planning.
Of utmost importance is that you do not gift more than you can afford. While you may wish to provide the world for your children or grandchildren, if it places your finances in jeopardy you may not be able to rescind the gift. Once you have decided what you can afford, there are a few options available.
The simplest option is to gift outright. There are many allowances available to do so each tax year without a liability. These include:
- £250 to as many people as you decide;
- Up to £3,000 each tax year (excluding the £250 rule above);
- Any unused £3,000 allowance from the preceding tax year;
- Wedding gifts of £1,000 per person, which increases to £2,500 for grandchildren, and £5,000 for children;
- Regular payments from your income, as long as they do not impact your standard of living.
If you are in the fortunate position to gift more than this, you can do so without an immediate Inheritance Tax liability. However, when you die, if the combined total in the seven year period prior to death exceeds £325,000, Inheritance Tax may be payable on the excess.
Although using the methods above can be tax efficient, they are not without their restrictions. The most compelling restriction will often be the loss of control over how the money is spent. This is particularly if larger sums are involved, or where the recipient has not had prior experience of wealth. Increasing the control exerted by you, however, will often have a resultant increase in cost.
A basic method to increase control would be using a Bare Trust, ensuring, for example, that the gift is only received once particular conditions are met, such as reaching a certain age. While falling under the same Inheritance Tax rules as an outright gift, above, there is an increase in cost for the setup and administration of the Trust, for example from solicitor fees, and tax assessments. Furthermore the beneficiary, once entitled, can spend the holdings however they like.
To control further, a Discretionary Trust could be utilised. This leaves it to the discretion of the Trustees to determine to whom, to what extent, and at what point (if at all) the wealth is apportioned between beneficiaries.
While this represents the greatest level of control over wealth, this can be by far the most expensive option, not only in setting up and ongoing costs, but for tax as well.
If over £325,000 is dealt with in this manner within a period of seven years, there is an immediate Inheritance Tax charge of 20% on the excess, and an Inheritance Tax payment upon death if occurring within seven years. There are also lower tax allowances, and greater income and capital gains tax liabilities, compared to holding the gift personally, and an assessment takes place every ten years where a tax charge is made on amounts in excess of £325,000. One also must be aware of the duties a Trustee has to their beneficiaries and assets, which can be quite stringent.
In determining the most appropriate balance of control and cost, planning is essential. By developing a full picture of your situation, and identifying your objectives and potential concerns for your gift, we can help assess the method most suitable for you and your family.
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