Will my heirs have to give back financial gifts?

Jeremy Woodruff is a Director and Chartered Financial Planner Picture: Smith & Pinching (Image: Archant)

I am concerned about how I can pass some of my wealth over to my children in my lifetime so that they’re not faced with an Inheritance Tax bill when I die. My estate is worth about £1.2 million. I’m a divorcee so will only have my own allowances to call upon. I’d like to start giving serious money to my two adult children each year – probably about £50,000 each per year – for the next few years, but I understand that if I die within seven years of giving them the money, they might have to give the money back. Can you explain how that works, please?

Jeremy Woodruff of Smith & Pinching responds:

It is a common misconception that gifts might have to be given back if you were to die within seven years of giving them. In fact, any gifts you make within the last seven years of your life will only be subject to Inheritance Tax (IHT) if the total value of those gifts exceeds your IHT allowance – known as your Nil Rate Band. Gifts are the first thing to be set against the Nil Rate Band when an estate is assessed for IHT purposes.

However, if you are giving away £100,000 each year in the seven years up to your death, then your gifts would clearly exceed your Nil Rate Band. That doesn’t mean that your children would have to give the money back, but it would mean that your IHT liability might need to take the gifted total into account.

From your enquiry, it would seem that you would be entitled to the standard Nil Rate Band of £325,000 plus an additional exempt amount under the Residence Nil Rate Band rules if you own your own home and plan to leave the value of it to your children or grandchildren. The actual amount of the Residence Nil Rate Band will depend on the value of your home, but can be – in the current tax year – up to £175,000.

This is a clear case for some financial planning: there is a careful balance to be achieved in reducing your IHT liabilities and continuing to meet your own needs throughout the rest of your life. There are potential solutions you might consider, such as the use of trusts, but it’s important to understand the implications for you and your heirs before you commit to this route. Pensions can also offer an IHT-efficient way of passing on your wealth, providing death benefits to your chosen heirs, but again it’s important to consider your own future needs.

I recommend you get independent financial advice. Advisers will usually use a form of lifetime cashflow planning to project the size of your estate under different scenarios, allowing you to factor in your proposed gifts and your possible needs in later life, such as long-term care.

Any opinions expressed in this article do not constitute advice. They assume the 2020/21 tax year and may be subject to change.

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