Inheritance Tax: Being the ‘Bank of Mum & Dad’ may cut your IHT bill – ‘Everyone wins’ | Personal Finance | Finance


Inheritance tax (IHT) is chargeable at 40 percent on the value of a person’s estate above a specific threshold – usually £325,000. As many have paid tax throughout their lifetime, Britons will generally want to avoid what is often perceived as a “death tax”.  But in order to do so, it is important to take action or risk loved ones being left with a financial burden. 

Redistributing one’s wealth will be the best way of mitigating an Inheritance Tax bill, and the Bank of Mum and Dad is being posited as a solution. 

Ms Ross continued: “What a lot of people forget is that there are a lot of different ways of giving money away.

“The most common is to give money away through Potentially Exempt Transfers (PETs) meaning you can give money away as long as you live for seven years.

“Most people will want to help their children and grandchildren in some sort of way and this could be a good method of doing so, particularly if they have the money.

“Parents or grandparents could use their £3,000 annual exemption, and if they have not used it in the last year, they could go back a year as well.”

Certain individuals will have a high income, but may not necessarily have a large amount of capital savings.

This, Ms Ross stated, may be as a result, for example, of previously high mortgage payments which have drastically improved over time, leaving people with reduced outgoings. 

However, there may be other approaches to take which can ensure everyone benefits.

Ms Ross added: “Some parents can act as the Bank of Mum and Dad to help children with their mortgage payments.

“If they make gifts on a regular basis, genuinely out of surplus income and the sums are of a similar amount, then those can be exempt from IHT immediately.

“Some parents have paid for their children’s annual holiday, or could pay for grandchildren’s private school fees, and some will just give their children or grandchildren money each year because they can.

“Gifts can be made in a wide variety of different ways, and there is flexibility when a person has surplus income.

“If by making a gift a person is not reducing their standard of living, then it can be a great way to redistribute wealth.”

Ms Ross stated she has observed a shift when it comes to Britons’ approach to Inheritance Tax.

Now, more and more people are keen to give money away to their children and grandchildren in their lifetime – rather than just leaving it in their will after they pass away.

However, this is an approach which has to be carefully considered, and Britons may wish to take advice as the matter can quickly become complicated.

Ms Ross concluded: “Of course, ultimately, this is a decision which will be based on affordability at the end of the day.

“But with an approach like this, everyone wins.

“Parents and grandparents can reduce their Inheritance Tax bill, and children and grandchildren can benefit from extra support.”

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