Offering Financial Support to Family without Sacrificing Your Own Financial Position

During the cost-of-living crisis and similarly difficult situations, helping a family member out financially can be a generous and supportive gesture. However, there are many rules to consider beforehand to ensure that you are not impacting your standard of living and creating an added Inheritance Tax (IHT) liability further down the line as a result. Here are some important points to consider in these circumstances:

From the Small Gift Exemption of £250 to the Annual Gift Exemption of £3,000, there are a number of rules and allowances to be aware of when it comes to gifting. Generally speaking, a direct gift of capital takes 7 years to be excluded from your estate for Inheritance Tax purposes.

Whilst you may be tempted to gift assets away freely, it is important to know that breaching these allowances and rules outside of this could see your family faced with an IHT charge that could have potentially been avoided with careful pre-planning.

Instead, adhering to gifting rules and keeping track of these can help you to support your family in a way that does not impact your own tax position.

When gifting to a spouse or civil partner, these are exempt from IHT, both during their lifetime and on death. However, if the estate of the first to die is passed in full to the survivor, this essentially means that the IHT liability is deferred until the second death.

Therefore, it may be unwise to rely heavily on this exemption as the second individual could see their estate increase greatly in later life when it may be too late to make tax-efficient use of gifts and further estate planning tools. Instead, this could just be postponing a greater IHT problem for your loved ones to deal with.

Other tax-efficient tools which can be used to help support family members financially are Trusts. We have access to a comprehensive range of Trust-based investments which allow you to move funds from personal ownership into the Trust – therefore sitting outside of your estate – for the benefit of your chosen beneficiaries.

A Discounted Gift Trust is a great example of a Trust that has an immediate impact as the amount invested is discounted for IHT calculation purposes – typically 50% of the initial sum invested – thus immediately reducing the value of your estate.

Loans can also be set up through a Loan Trust that caps the loan value and all growth on the invested money belongs to the beneficiaries so is outside of your estate for IHT calculations.

Structured loans are another tax-efficient way to help a family member financially, whereby the amount loaned remains within your estate as an asset, but your family has access to the funds during your lifetime and can use the money as needed. If, at some point in the future, you decide to write off the loan then the funds are deemed to be a gift and therefore assessed differently for Inheritance Tax calculations.

It is also possible to financially support a child or grandchild with school or university fees, providing that you are able to demonstrate that the money is surplus to your requirements and you are not harming your standard of living by making the gifts. This is a popular approach to help prevent a build-up of excess savings when you may already have breached IHT thresholds and will not trigger the 7-year gifting rules.

Areas such as taxation, Trusts and estate planning often come with complex rules that must be carefully considered to ensure you do not adversely affect your own financial position when supporting your family. Therefore, it is wise to seek professional guidance from an Independent Financial Adviser to create a tax-efficient plan based on the needs of you and your family.

Please do not hesitate to get in touch with an Integrity365 Independent Financial Adviser on 0117 450 1300 to discuss your own family’s financial planning needs.