Can I give money to my children now without causing a problem later?

While you may want to help your children, you shouldn’t compromise your lifestyle in the process.

You need to consider your future income and expenditure, as well as any significant costs that could arise further down the line, such as care.

This is particularly important because a gift is generally irrevocable. Once you’ve given the money away, you can’t necessarily rely on getting it back if your circumstances change.

Cashflow modelling can help you understand how your finances could look over the longer term. By modelling different scenarios, an IFA can help you assess what your future needs may be and whether you have enough resources to support yourself while also giving money to your children.

There are several gifting allowances that let you give money away without it becoming liable for IHT. These include:

• The annual gifting exemption: You can usually give away up to £3,000 each tax year under your annual exemption. If you don’t use the full exemption, you may be able to carry the unused amount forward by one tax year, and couples can combine their allowances.
• Gifts for weddings or civil partnerships: You can give up to £5,000 to your children, £2,500 to grandchildren, and £1,000 to anyone else for their wedding or civil partnership.
• Unlimited small gifts: You can also make small gifts of up to £250 to as many people as you like, provided you haven’t used another gifting exemption for the same person.
• Regular gifts from surplus income: This allows you to make regular gifts from your surplus income without them becoming subject to IHT, provided certain conditions are met and the gifts don’t adversely affect your standard of living.

Gifts that don’t qualify for any of these exemptions are typically treated as potentially exempt transfers (PETs).

A PET can become completely exempt from IHT if you survive for seven years after making the gift. However, if you die within seven years, IHT may be charged on the gift.

If you’re gifting as a couple, it’s worth considering which person makes the gift.

For example, if one partner has a higher income, they may be better placed to make regular gifts out of income. Or if one partner is considerably older than the other and you want to make a larger gift, it may make sense for the younger partner to do it, as they’re more likely to have a longer life expectancy.

It can also be a good idea to make use of your annual gifting exemption each tax year rather than waiting to make one much larger gift, as this allows you to gradually pass wealth to your children. For example, over 30 years, a couple could pass on £180,000 (under the current allowances) without incurring IHT.

In every instance, it’s important to think about what you want your gifts to achieve and the mechanisms and strategies available to help give them efficiently.

Cash is often the simplest way to help your children financially and can be particularly useful for helping them make immediate purchases.

However, cash can lose its purchasing power over time because of inflation. So, if you’re giving a significant amount that may not be used immediately, it may be worth considering whether other types of assets are more appropriate.

This could include:

• Investments: They have the potential to grow over the long term and have historically had a better chance of beating inflation than cash, although their value can fall as well as rise.
• Property: This can help ensure your most expensive assets are not liable for IHT. However, depending on the circumstances, it could also result in Capital Gains Tax (CGT) or other tax and legal implications.
• Pensions: You can make regular gifts from your surplus pension income. This may become more popular as pensions are set to be liable for IHT from April 2027. However, it’s important to consider your future income needs and to ensure your gifts don’t adversely affect your standard of living.
• Trusts: For larger or more complex gifts, trusts can be an efficient way of passing on wealth while also managing how it is used. However, trusts have their own tax and legal implications and may not be suitable for everyone.

An IFA can help you determine the best strategies for your gifting plan.

While gifting can be an effective way to pass wealth to your children, there are several pitfalls to consider, including:

• Gift with reservation of benefit: This can occur when you give an asset away but continue to benefit from it. For example, if you gave your home to your child but continued to live there without paying market rent, the gift could still be treated as part of your estate for IHT purposes.
• Unexpected CGT: Some gifts can trigger CGT, so it’s important to consider the potential tax consequences before transferring investments, property, or other assets.
• Failing to keep records: Keeping clear records of gifts is also important. You should record details such as what was given, when it was given, who received it, and where the money came from. This can make it much easier for your executors to establish what gifts you made and whether any IHT is due when the time comes.
• Losing control of your money: Finally, remember that giving money away is usually irrevocable. As discussed earlier, it’s important to ensure your needs are covered and that you are unlikely to need the money again in the future.