QUESTION: I sold my business a number of years ago and I am now thinking about giving some of the proceeds of this sale to my children. What are the tax implications if I decide to make gifts of cash to my children?
ANSWER: If you’re handing over regular or lump sums to your children to give them a financial boost, you need to be aware of the potential implications.
The good news is that a cash gift by an individual does not fall within the scope of capital gains tax as cash is regarded as an ‘exempt asset’.
Whether you’re giving a helping hand to help your children get onto the property ladder, or provide an income boost, there are potential inheritance tax implications to consider.
Every individual has an annual inheritance tax (IHT) gift allowance. This enables you to give some money away each year to your children without needing to worry about inheritance tax. The annual allowance is £3,000 per person. Remember this is your personal allowance, so you cannot give each of your children £3,000 each. You would need to split it among your children, if you’re giving money to more than one.
If you haven't used last year’s annual allowance, you can carry this forward. So you could give £6,000 in a year to your child and avoid IHT problems – or up to £12,000 if both parents want to give money and haven’t already used their allowances.
You can also give smaller sums of up to £250 a year to as many people as you like. However, you cannot combine the £250 with another allowance – for example, giving your child the £3,000 annual allowance plus a £250 small gift - as this isn’t allowed.
If you wish to give your children a more sizeable sum over and above the annual allowance, tax implications can become complicated. If you die within seven years of making that gift, there could potentially be up to a 40 per cent inheritance tax liability payable by your child, depending on the cost of your estate. However, as long as you live seven years after making the gift – known as a ‘potentially exempt transfer' – then there is no tax to pay.
Planning ahead, using the annual allowances to pay into a trust for your children several years in advance of when you may have actually intended to gift them, could be a good option in the long run. A trust may not be cost effective for small cash gifts due to the costs of setting up and running a trust. Trusts can be complex and professional advice should always be sought.
Also, discretionary trusts often incur 10-yearly charges and exit charges can also arise when funds are paid out for the benefit of the beneficiaries. These additional trust tax charges, if they arise, are a maximum of 6 per cent. Nevertheless, the use of trusts is often a tax efficient way of reducing IHT exposure and making tax efficient gifts of cash to the next generation, particularly as it allows the parent to retain a degree of control over the cash until it is paid to the children in later years.
You can give extra sums for events like weddings. If your child were to get married, you can give an additional £5,000 towards the wedding. So this is another allowance available to you, on top of the others mentioned.
Grandparents and great grandparents can each give cash or gifts worth £2,500 on the occasion of a wedding, and anyone else can give £1,000.
If you’re still working and paying out of your income, you can make regular payments out of this income to your children and this won’t be subject to additional tax. As far as the taxman is concerned, you can spend this money as you see fit as you’ve already paid your liability. However, remember that regular payments come from your income, not your savings, and rules state they mustn’t significantly impact your standard of living. If you are making regular payments, make sure you can prove these are from income if the taxman comes knocking.
It is always advisable to take professional advice before you decide to make significant sums of cash gifts to you children.
:: Malachy McLernon (m.mclernon@fpmaab.com) is partner at FPM Accountants Ltd (www.fpmaab.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies .
