Although more than half of parents are prepared to financially help their children buy their first home, many could be risking their offspring's property by failing to consider Inheritance Tax.
A survey of 3,346 adults, conducted by YouGov in March, reveals 52% of parents provide financial support when their children buy a house, and yet less than 10% consider the IHT implications.
The research from Standard Life Bank shows while 81% of parents have provided lump sums of up to £50,000, only 4% took financial advice on gifting money to their children, while 70% of parents are unaware the money could make their children liable for IHT if they die within seven years.
Around 34% of parents say they would willingly provide money to their children, while 15% provide it as a loan despite many not expecting it to be repaid and instead treating it as an ‘early inheritance’ gift.
Meanwhile, 32% of respondents admitted to not thinking of the IHT issues involved in making these payments, although if gifting the money away sooner rather than later helps to avoid tax they believe it to be a “good move”.
Julie Hutchison, estate planning specialist at Standard Life, warns while it is encouraging so many first-time buyers are receiving financial help, she says parents should be warned of the possible consequences of their actions.
She points out if the money is treated as a gift then as a Potentially Exempt Transfer (PET) it will take seven years before the money becomes IHT free, while any money given as a loan could have to be repaid on the parents’ death.
As a result she suggests both parents and their children need to look carefully at the consequences of these agreements, although she points out one possible solution is for the parents to include a clause in their will which forgives their children’s debt.
Hutchison says: “It concerns me that just one in seven parents have an ongoing strategy to dispose of their assets before they die and a fifth that have loaned money haven’t considered the tax implications of their decision.”
“Sensible IHT planning could really benefit both parents and children and the best way to get all the options and make the right decision is to take financial and legal advice.”
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