Bank of Mum and Dad risking IHT gift trap

Posted on Sunday, June 18, 2017

The latest research from Key Retirement has revealed that 47% of parents and grandparents do not understand the tax rules on gifting, and nearly three out of four (73%) say the rules are very complicated.

Key’s research found 38% are not aware their estate might be liable for inheritance tax (IHT) on gifts to family members.

The research, which focusses on the gifting behaviour and plans to gift from the Bank of Mum and Dad, shows 58% want to be able to help children and grandchildren on to the property ladder, which with average house prices at £217,0002 will mean paying out more than £40,000 for a 20% deposit. Around 18% of parents and grandparents would want to help pay off debts and student loans, while 13% would want to fund a wedding for children or grandchildren.

New inheritance tax rules introduced last month mean single homeowners have new higher IHT allowances of £425,000, and couples allowances of £850,000, rising in stages to £1 million for couples by 2020/21. However, the higher allowances only apply to family homes and only after death. The allowance otherwise is £325,000 (£750,000 for couples). Any gifts over the value of £3,000 need to be given more than seven years before death or they are potentially liable to 40% inheritance tax, if the threshold has is exceeded. The good news is that for the majority of people gifts should be exempt where wealth is predominantly in the home. However, for those whom this would not be the case there should be greater incentive to gift.

Key’s Equity Release Market Monitor shows equity release customers are cashing in an average £73,610 tax-free from property wealth, with around 22% of customers using some or all of the cash to help families.

Key believes encouraging intergenerational gifting for major purchases through tax breaks could play a major role in tackling intergenerational wealth issues by helping families get on the property ladder or paying off student loan debt. The research revealed that 37% of those questioned would be prepared to gift a ‘living inheritance’ were there tax incentives in doing so.

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