Many people reach a point in their lives when they become able to make gifts to their children, sometimes fairly significant. This may be to help them with university fees or to look to help them onto the first step of the housing ladder.
Where children are at (or sometimes when close to) the age of 18, there are opportunities available using family trusts.
Key to this is that the parents should not need the funds in the trusts themselves, and would prefer for them to be outside their estates for inheritance tax purposes. However, they will be doubtless concerned that there could be significant value placed in their children’s hands at a relatively young age, with the risk of future divorce and/or bankruptcy.
Option 1 – Make an absolute gift
Parents can, of course, make a gift of the money directly to their children, who in turn could do with it whatever they wished.
The main concern is that there is no protection for the funds should something untoward happen, e.g. divorce/bankruptcy.
Option 2 – Make a gift into new trusts
By way of an alternative, the funds could be transferred into one or more family trusts. This is a step that requires legal advice, as creating a trust can have significant legal and tax implications for the people involved.
Each individual can gift up to £325,000 into trust without there being an immediate charge to inheritance tax. However, there is a charge within the trust after 10 years, of 6% of the amount by which the trust fund exceeds the then nil-rate band. If the assets of the trust are distributed just prior to the anniversary, it is often the case that there would be no charge. You may wish to consider the following:
- You could potentially make gifts between yourselves to balance assets as required.
- You could each, after appropriate careful consideration, jointly settle £650,000 onto trust for your children, thereby avoiding an immediate charge to inheritance tax.
- You may wish to consider using a separate trust for each child. While this increases cost and complexity somewhat, it allows each child to regard their trust as their own and reduces the risk of friction in the future as funds evolve at different rates following different investments.
- Each trust could then invest their funds or buy properties for the children, ensuring that the beneficiaries have a right to occupy the property to minimise SDLT charges.
The result of this is that £650,000 is transferred from the parent’s estates, and after seven years this is outside the scope of inheritance tax on their deaths.
This arrangement should be kept under review to ensure that funds are passed at the appropriate time.
An advantage of this arrangement is that the funds are significantly protected against bankruptcy or divorce so long as it is done well before there are financial difficulties or before a marriage. As time passes the value moves from the parents’ estates into the trust regime. The decision can be made before the 10-yearly inheritance tax charges crystallise whether to accept the tax charge within the trust or appoint the property out to the beneficiary aware of the risks that entail.