Gifts to grandchildren
It is rare for most people to make direct gifts to grandchildren in their wills as they would normally just pass it down to their children with the option of them passing it on to their children; however this is not the most tax effective way of doing it. Forward thinking can reduce the eventual overall tax.
You may worry about leaving large sums of money to your grandchildren due to the fear of it affecting their motivation to work as well as the appreciation for the value of money.
14 million grandparents spend an average of £74 on each grandchild for Christmas. But those grandparents that are generous can give up to £250 to each grandchild without the worry of inheritance tax on that money.
Help with education fees
Those grandparents who are helping their grandchildren pay for school fees will be making gifts which could potentially be liable to Inheritance tax. As long as the amount given is under £3,000 per year per person making the gift then the recipient will be exempt from having to pay inheritance tax. However, it will diminish the taxable value of their grandparent’s estate a little bit at a time.
Education of the child over the course of their education can result in significant fees which if deducted from the value from your estate will generate significant IHT savings.
If you have an annual income which is a lot more than your normal annual expenditure then you will be able to use some of that excess money to pay for school fees as long as you have enough money left over to keep your standard of living. These gifts will be tax free. It is important that any gifts made are well documented as they utilise a less well known “gifts out of normal income” rule.
Helping to buy property
A solution to the housing crisis is to encourage wealthy people to leave their properties or cash to buy one to their grandchildren. If you do make gifts when you are still alive then the value of the contribution will remain in your estate and then drop out of the potential IHT liability after 7 years from the date of the gift.
A way of avoiding this if that if you have younger grandchildren as well as a surplus income then it may be better for you to put the surplus income into a trust so you can build up a fund which can be used for deposits later on when required. This way provided the money gifted is from surplus income ( as opposed to from capital) there will not be a seven year run off when the funds are needed for housing purchases.
Help with getting married
Up to £2,500 can be given as a wedding gift to grandchildren either before or after the wedding which will be free from IHT, although it must be conditional on the marriage taking place.
Help with pensions
The changes to the tax system for pensions presented the chances to use these as tax-planning vehicles. You could pay into a child’s pension up to £3600 a year while they are young. This early start will have a massive impact on the final value in later years.
If you are under 75 then you are able to take 25% of your pension before you turn 75 totally tax free to make gifts to grandchildren.
If you die before the age of 75 then you can pass the pension onto the nominated beneficiary free of inheritance tax as well as being free of income tax when the money is withdrawn. But if you die after the age of 75 then it can be passed on inheritance tax free but there will be tax if money is withdrawn at your highest marginal rate.
If a grandchild is nominated as a beneficiary they can withdraw significant funds tax free while they are in education up to the value of their personal allowance.
An option regarding wills is to leave your property to your grandchildren as it skips a generation. This probably won’t save tax upon your death but it will be beneficial to your grandchildren as it could eliminate another 40% tax charge on your estate as if they have already accumulated wealth which puts them into the inheritance tax charging zone.
To benefit the entire family, you could leave your estate to one or more discretionary trusts.
If you have any questions on how best to make gifts to grandchildren please, call us for advice from an experienced financial planner.
Tax planning for HNW people
A third of the high net worth individuals (worth at least £20 million) of the UK are being looked at regarding tax affairs by HMRC. There is considered to be around 6,500 HNWs, which is 0.02% of all taxpayers.
However, the tax year of 2016/17, more and more taxpayers are being scrutinised by HMRC due to the HNW considerations for in depth scrutiny being halved to £10million.
In previous years HNWs have paid over £3.5billion in income tax and national insurance which added with all other taxes totals to over £4.3billion worth of tax in one year. This number totals 1.3% of total revenue for those specific taxes. Inheritance tax paid by HNWs between 2014 and 2016 totalled to £183million.
As so much tax is already being paid, it is likely that in depth scrutiny of these peoples tax affairs is worth investigating by HMRC. Therefore, tax planning for HNW people is essential.
It is estimated that the formal enquiries of tax is valued at £1.9billion and £1.1billion is related to marketed avoidance schemes, with it also being estimated that 15% of the wealthiest have used at least one scheme. Tax avoidance schemes are being used by more and more famous and wealthy every year. Such as, over 100 BBC staff are being investigated over potential tax avoidance.
HMRC are making moves to try and understand and engage with the behaviour of HNWs. Because of these behaviours, it is becoming more difficult for HMRC to ensure that the correct amount of tax is being paid; the specialist team of HMRC is fast gaining a better understanding of HNW people tax affairs and will ensure the correct amount of tax is being paid each year.
Everyone has got to pay the amount of tax that they owe, and HMRC is keen to ensure there is no way around that. An additional £416million was taken in tax from the wealthy last year, which would have gone unpaid if not investigated.
HMRC are clearly focusing on the wealthy taxpayers of the UK. This makes it clear that you need an experienced financial advisor to make sure that this doesn’t happen to you and so questions from them can be answered with no need to worry.
Tax planning for HNW people is an increasing area of our business so please call us if you need help in the area.