Bank of Mum and Dad – the Tax Risks

A recent study conducted by Key Retirement has found that many individuals in the UK are not aware of the potential inheritance tax (IHT) implications of gifting money to family members.

The research specifically focuses on the gifting behavior of parents and grandparents from the “Bank of Mum and Dad” and reveals that a significant number of people are unaware that their estate may be liable for IHT on these gifts. The study also highlights the desire of parents and grandparents to assist their children and grandchildren with various financial needs, such as purchasing a property, paying off debts, and funding weddings.

The research shows that 58% of parents and grandparents want to help their children and grandchildren onto the property ladder, which currently requires a substantial 20% deposit of over £40,000 based on the average house price of £217,000. Additionally, 18% express their desire to support their family members in paying off debts and student loans, while 13% would like to finance a wedding.

The introduction of new inheritance tax rules has established higher IHT allowances for single homeowners (£425,000) and couples (£850,000), which will gradually increase to £1 million for couples by 2020/21. However, these higher allowances are applicable only to family homes after death. The standard allowance remains at £325,000 (£750,000 for couples). Gifts exceeding the value of £3,000 must be given more than seven years before death to avoid potential liability for 40% inheritance tax, assuming the threshold has been exceeded. One positive aspect is that gifts should generally be exempt if the majority of an individual’s wealth is tied up in their home. Nevertheless, for those with significant assets outside of their property, there may be a greater incentive to gift.

Key Retirement’s Equity Release Market Monitor indicates that the average tax-free cash realization from property wealth for equity release customers is £73,610, with around 22% of customers using some or all of the funds to assist their families.

According to Key Retirement, providing tax breaks for intergenerational gifting towards major purchases could play a crucial role in addressing intergenerational wealth disparities. This could involve helping families get onto the property ladder or paying off student loan debt. The study demonstrates that 37% of participants would be willing to provide a “living inheritance” if there were tax incentives involved.

Dean Mirfin, the technical director at Key Retirement, emphasizes the importance of providing clarity on the rules surrounding financial gifting. He also supports the idea of tax breaks on gifts and early inheritance, “We would support tax breaks on gifts and early inheritance in those instances where the incentives can be used for major intergenerational gifts, which have a greater perceived societal benefit. From rising student loans to property prices younger generations need a helping hand more than ever. Early inheritance can have life changing consequences for some families and our study shows that equity release could be a major source for these gifts”

The research conducted by Key Retirement highlights the need for greater awareness and understanding of the potential inheritance tax implications of gifting money to family members. Many individuals are unaware that their estate may be liable for IHT on these gifts. The study also reveals the desire of parents and grandparents to assist their family members in various financial aspects, such as purchasing a property, paying off debts, and funding weddings.

The introduction of new inheritance tax rules has brought about higher allowances, but these apply only to family homes after death. Tax breaks on gifts and early inheritance could play a significant role in addressing intergenerational wealth issues, and equity release may serve as a valuable source of funds for such purposes.