Taxman has his sights on Bank of Mum and Dad

PARENTS and grandparents looking to help younger family members with a bit of cash are risking a shock tax bill due to complex rules.

The Bank of Mum and Dad is busier than ever helping the younger generation climb onto the property ladder or pay for university tuition fees.

However, new research shows that almost half of parents and grandparents fear incurring a hefty inheritance tax (IHT) bill because they fail to understand increasingly complex rules.

According to over-55s financial specialists Key Retirement, it is still possible to hand out cash and beat the taxman, provided you plan carefully. Key Retirement’s research shows that nearly six out of 10 parents and grandparents want to help children and grandchildren onto the property ladder, even if it means forking out large sums.

With the average house price standing at £220,000 in April, according to the Office for National Statistics, first-time buyers will have to produce £22,000 to put down a 10 per cent deposit.

Almost one in five parents and grandparents want to help younger family members pay off debts and student loans, while 13 per cent would like to fund a wedding.

However, 47 per cent are unsure how to share their family wealth tax efficiently, while three quarters say the rules are too complicated.

Many did not even realise that gifts to family members could end up being liable to IHT.

The Bank of Mum and Dad – and Gran and Grandad – risks falling foul of rules on gifting and inheritance tax, according to Key Retirement. Dean Mirfin, technical director, said that as the financial squeeze on younger generations worsens it makes sense that people want to help their family now rather than waiting until their death: “With rising student loans and property prices, younger generations need a helping hand more than ever.” The threshold at which families pay IHT has been held at £325,000 since 2009, doubled to £650,000 for married couples.

Since April, the new main residence nil-rate band has allowed families to pass on another £100,000 of their home’s value to children and grandchildren, steadily rising to £175,000 over the next three years.

By then, with careful planning, a family could potentially protect the first £1million of their wealth.

Any assets that are subject to IHT are taxed at a punitive 40 per cent, which means that for every £100,000 of taxable wealth, £40,000 will go in IHT. Gifts only escape IHT completely if you live for another seven years after making them, what is known as a “potentially exempt transfer”.

Mirfin called for tax breaks on family gifts and early inheritances. He added: “There is real nervousness and confusion when it comes to the awareness around the rules of financial gifting.” Adrian Lowcock, investment director at wealth managers Architas, said that everyone can give away up to £3,000 a year without any IHT charge.

“You can also use any unused allowance from the year before, which means that you could give away £6,000 in total this year totally free of IHT. Married couples could gift £12,000 between them,” he added.

Patrick Connolly, certified financial planner at Chase de Vere, said you can also give small gifts of up to £250 a year to as many people as you like, provided they have not benefited from any other exemption. “Parents can gift up to £5,000 free of IHT when children marry, grandparents can gift £2,500 and anyone else £1,000.”

You can also gift tax-efficiently out of surplus income or by setting up a trust, and it may be worth taking independent financial advice to make sure you are helping your family without the taxman taking his share.