Inheritance Tax  

Parents gift early to avoid inheritance tax bill

Parents gift early to avoid inheritance tax bill

Nearly 7 million parents have given their children an inheritance early to try to reduce the amount of tax payable on their estates, according to research from insurer Direct Line.

The research found a total of £227bn worth of inheritance tax was given to children early and a further 6.5 million parents plan to hand over money early to avoid a tax bill.

It also found 13 per cent of parents were concerned they might need their assets in retirement while 9 per cent said they were unaware that gifting their money could reduce their inherritance tax bill when they pass away.

One in seven divorcees had already transferred assets to their children or had placed them in trust, gifting on average £16,602.80, and 37 per cent of divorcees planned to transfer money in future if they remarried.  

Jane Morgan, business manager at Direct Line, said: "It is important that people planning to transfer money understand the tax implications that a gift might give rise to.

"With almost one in ten (nine per cent) parents placing their assets into trust, this is something people should also consider when arranging their life insurance.

"Placing a life insurance policy into a trust could avoid payments being included in inheritance tax calculations.

"However, despite this, just 20 per cent of people with a life insurance policy have placed this into trust and almost a fifth of those with a life insurance policy admit they did not know this was an option."

The research suggested the importance of seeking financial advice when considering putting a life insurance policy into a trust, saying it should be ensured money paid out from the life policy is not part of the estate of the person covered, helping to minimise inheritance tax.

Philip Munro, partner at Withers LLP, said: "Lifetime gifting is a strategy that can be used to reduce a future potential inheritance liability and will appeal to many parents who want to provide for their children, particularly as they may be struggling to access the current housing market.  

"However, there can be inheritance and capital gains tax implications in the making of gifts and so parents should consider taking tax advice.

"Where individuals are taking out life insurance it would often be recommended that these policies be held in trust to avoid their proceeds being taxed on the death of the life insured."

Inheritance tax planning has been predicted to boom in the wake of the government's Budget which outlined that it would collect £1.5bn in inheritance tax by 2021/22.