A common question from our clients: If I give money to my children, will they be taxed on it?
The answer is No – well not directly anyway. We explain to clients who ask this question is – if you make a gift to children, you will never be in a worse position than if you had not made the gift in the first place.
There is a misconception that you cannot give more than £3,000 in any tax year, but this is not the case. The fact is you can give any amount (up to the nil rate band for IHT of £325,000) without triggering any kind of tax charge. Where a tax implication does arise is if the person giving the gift dies within the seven-year period from the date of the transaction.
It is however vital to understand that if death does occur, no tax charge will be incurred by the children nor will they have to return the gift. All that happens is all or part of the gift will be nominally brought back into the estate for the purpose of calculating any inheritance tax liability. An exception to be aware of is gifts from income, where a different set of rules come into play.
For those concerned by the seven-year rule, there are other opportunities where an investment can be free from IHT after only two years as long as the investment is still held at the date of death.