Can we give our two daughters cash now and avoid inheritance tax?
One of our experts answers a reader's question.
27th February 2020 16:20
Q
“My wife and I want to give our two daughters money now to avoid inheritance tax (IHT). We know at least one of us has to live for another seven years, but do we have to do anything legally to do this or can we just give them the money?”
From: NC/Nantwich
A
There are a number of things you should consider before making such a gift.
First, do you actually have an IHT liability now that you are hoping to reduce? Remember that each of you has a nil-rate band of £325,000, on which no inheritance tax is paid. If you own a house, you also have the residence nil-rate band which is due to go up to the full £175,000 in April this year – effectively giving you a total £500,000 each that can be passed on tax-free.
Any nil-rate band not used by the first to die can be passed on to the surviving spouse. If none had been used, this would mean a total of
£1 million can be passed tax-free to your daughters when the second spouse dies.
Next, do you have any assets such as pension funds that would be passed to your daughters outside your estate, and therefore not subject to IHT?
If you still wish to proceed with the gift, you should draw up a brief letter addressed to each daughter stating that you are making this gift of £XX and the date of the gift. If you have not used your annual gift allowance of £3,000 you could include a note, saying: “The first £3,000 is using my annual gift allowance for the 2019/20 tax year.”
A copy of this letter would then be left with your will, so your executors have a complete record when they are preparing the probate application.
Francis Klonowski is director of Klonowski & Co
Do you have a money question for our panel of experts?
At Moneywise, we have a panel of top experts to help with your money and investing questions. If you have a tax issue that’s keeping you awake at night, a question about investing that you’ve always wondered but been too shy to ask, or even need a full money makeover for free, we’d love to hear from you.
If you have been treated unfairly by a firm send the details to Moneywise’s Fight for your Rights and we could take up the fight for you.
Email fightback@moneywise.co.uk
If you have a question about your investments or investing in general, put it to our Investment Doctor.
Email editor@moneywise.co.uk
If you have a question about your personal finances – anything from tax to state pensions, inheritance tax, property sales and more – write to our Ask the experts panel.
Email advice@moneywise.co.uk
Would you like a full money makeover? We will arrange a free one-to-one meeting for you with an FCA-regulated independent financial adviser worth over £2,000.
See Moneywise.co.uk/money-makeover for more details.
This article was originally published in our sister magazine Moneywise, which ceased publication in August 2020.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.