Giving Money to Your Children: FAQs

Helping your children out financially is something that every parent would want to do. However, you need to be careful if you do not want them to receive a large bill from the taxman. Here are some things that you will need to know.

Giving money to your children may seem like an excellent way to assist financially. However, while there is no limit on how much you can give, there are some tax implications to consider.

Give them the cash in the wrong way or at the wrong time and they could end up being chased after by the tax man at a later date.

Here are some things that you need to think about before writing a cheque to your children.

Inheritance tax

Fact: Inheritance tax will see the government get a portion of your estate before it is passed on to your children; it is also implemented to any monetary gifts that you give in the period of 7 years after your death.

The primary concern for most parents giving money is that their children will have to face an inheritance tax bill should they die.

Your estate (the possessions, savings, and property that you leave behind) is assessed when you pass away.

The first £325,000 of anything you own is exempted from inheritance tax (also known as the nil rate band). However, the amount over this is taxed at 40 percent.

As an example, say your estate is assessed at £425,000, the first £325,000 of this would be exempted from inheritance tax. However, £100,000 of its value would be taxed at 40 percent so the tax man would demand £40,000 before the balance is transferred to your next of kin.

However, if you are married, you can transfer your full estate to your spouse if you have passed away without paying any inheritance tax.

By doing this, you also transfer your £325,000 inheritance tax exemption, so £650,000 of your combined estate would remain exempted from inheritance tax on their passing.

Exemptions and allowances

There are a series of additional allowances and exemptions that allow you to gift money without the worry of Inheritance Tax aside from the Inheritance Tax exemption threshold.

Here are the most relevant if you are thinking about giving money to your child.

  • Special Occasions
  • Annual Allowance
  • Selling your house
  • Regular payments

Income tax

Tax break: Gifts are exempted from income tax as they are not considered as a source of income by the HMRC, and therefore you do not need to be concerned regarding income tax when gifting money to your daughter or son.

You may be worried that by gifting money to your children, they will be driven into a higher income tax band, or be subject to pay income tax on the gift itself.

However, this is a common misunderstanding and as long as your child is over 18 is not the case.

Loss of benefits

Something else to consider before you gift money to your children is the effect it might have on their rights to receive benefits.

Although gifts are not considered as a source of income, and therefore cannot put the earnings of your child over the benefit thresholds, some benefits depend on the amount of savings that you have in the bank.

For example, if your child is presently receiving income support and your gift would see their savings rise to over £16,000, they could lose their benefits as a result.

To let your daughter or son avoid losing any income from benefits it is best to sit down and check if the gift you wish to give your children would cause any issues.

Know more information regarding income support here.