No one needs a tax bill as a housewarming gift

The Bank of Mum and Dad helps get thousands of people on to the property ladder every year, but if you plan to give your children a cash gift, you will also need to consider the tax man if you want to avoid paying a bill later on.

Giving away £14 billion

According to research from the Institute of Fiscal Studies (IFS), the Bank of Mum and Dad gave away nearly £14 billion in cash gifts between 2018 and 2020 to help their children with a “significant life event” - i.e. getting on the property ladder or paying for a wedding.

As the cost of living increases, property prices are soaring and wages are doing very little to keep up, the Bank of Mum and Dad has never been more important.

The most common reason for lending is for buying a home

Statistics from estate agency Savills revealed first time buyers received £8.8bn from family members in 2022 to purchase their home and in 2021 it was £10.7 billion. That means the Bank of Mum and Dad is the equivalent to a top 10 mortgage lender.

But the thing to remember for parents giving lump sums to their children is that they can become subject to inheritance tax (IHT).

The seven-year rule

Cash gifts of more than £3,000 per tax year are subject to what’s called the “seven year rule” - so you must stay alive for more than seven years after you have given that cash gift in order for it to become exempt from IHT. You can give away cash gifts of up to £3,000 per tax year free from IHT, but remember, that is in total.

You can give away larger cash gifts up to £5,000 tax free to one of your children if it is a gift for a wedding or civil partnership. You can give £2,500 to a grandchild or great grandchild, and £1,000 for anyone else.

You can also give many small gifts of £250 per person tax free, but you must not have used another allowance on that same person.

Seeking advice

How to proceed with making lifetime gifts depends entirely on your circumstances and it is worth considering any potential issues that might pop up in future.

You want to give a genuine gift that could make a real difference to your child or grandchild - so make sure it doesn’t have a sting in the tail later on!

If you would like some advice, contact the Private Client team at Downs Solicitors to see how we can help.