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A fifth of parents give early inheritance to avoid tax

View profile for Sarah Begley
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Recent research has revealed that one fifth of parents have transferred assets to their children to lessen the amount of inheritance tax payable on their estates.

Direct Line’s research revealed this amounted to more than 6.9 million parents and the assets moved amounted to £27 billion, an average of £32,920 per parent. In addition, another 6.5 million (19 percent) of parents said they hadn’t yet transferred their assets but planned to do so.

At present, the inheritance tax (IHT) threshold in the UK is £325,000 per person which has been the case since 2010-11 and there are no plans for this to rise until at least next year. There are other IHT allowances which may be available to be used to mitigate any IHT liability and each case is different. For example, if your estate includes a home which is being left to direct descendants or, if you’re married or in a civil partnership, your allowances may be different. Anything over the IHT threshold is subject to the inheritance tax rate of 40 percent.

Gifts and the seven-year rule

Gifts between spouses and civil partners, and gifts to charities aren’t taxed. Parents can also give their offspring tax-free gifts, as long as they are made more than seven years before death and to an individual, rather than a business or trust. If the parent dies within seven years, the gift may be taxed. It is important to keep a record of any lifetime gifting.

The research also revealed that only 20 percent of people with a life insurance policy had placed it into a trust to avoid additional inheritance tax. Almost a fifth of those who had a life insurance policy didn’t know this was an option.

Direct Line found that the increasing number of broken marriages are making inheritance planning more complicated, divorcees often transfer assets to named heirs early to avoid them going to new partners if they remarry. Some 15 percent of divorcees have transferred assets to their children or placed them in a trust. The average gift size was just over £16,600.

It is also important to review your pension arrangements, are those nominations up to date?

Tax implications

Jane Morgan, Direct Line Life Insurance’s business manager said it was important for people planning to transfer money that they understood the tax implications of gifts, to ensure they maximised the money they left behind.

Danny Curran, Finders International’s founder and managing director, said: “It’s easy to understand why so many people opt for gifts during their lifetime. It appeals to many parents who want to help their children gain access to the housing market, for example.

“Our new enhanced UK and Overseas Missing Asset Search service can help administrators and estate executors locate missing life insurance policies, if applicable. Searches take 50 days to complete, but we can keep you informed of anything we find during that time and will also let you know if we find assets after the 50-day period.”

Sarah Begley of MTP said It is important to think about the timing of any gift and the size and value in conjunction with the overall value of your estate. Depending on your circumstances some gifting may be considered a deliberate deprivation of assets. If you would like any further advice we suggest you may wish to discuss the most tax efficient manner to deal with gift proposals with your solicitor.

Contact our experts for further advice