Leave it to me – the Grandparents’ dilemma
I recently attended an event at my daughters’ school which was held to celebrate grandparents and the important role they play in our children’s lives. The message the headmistress effortlessly conveyed was of omnipotent grandparental support - existing ever so softly in the background of our children’s’ lives.
The support the Headmistress was talking about was emotional and psychological - but in our modern society the high costs of education, housing, and basic costs of living mean that our children also need more than parental financial support. I am often approached by grandparents asking for advice about helping their grandchildren financially; “how much can I give tax-free” and “how will gifts affect my inheritance tax position” – all easily explained within the parameters of the law.
Exemptions and reliefs
Most of us will have heard something about lifetime gifts and the seven-year rule and exemptions and reliefs.
- Each individual has an Annual Allowance of £3,000 without incurring any tax consequences. This means that you can “gift” up to £3,000 each year without any Inheritance Tax consequences.
- You can also make a number of small gifts up to £250 to different people. This Christmas, it may be important for you to consider the gifts you are making from an Inheritance Tax and Estate Planning perspective.
- In addition, you can make larger gifts in contemplation of marriage; as follows:
- £5,000 in consideration of marriage of any of your children;
- £2,500 in consideration of marriage of any of your grandchildren or great-grandchildren;
- £1,000 in consideration of marriage to any other person.
- You may also make regular, habitual gifts out of your income, free of Inheritance Tax, provided they leave you with sufficient income to maintain your usual lifestyle.
- All gifts to charities and Political Parties are exempt from Inheritance Tax. Therefore, during your lifetime, you may wish to make charitable gifts of any size out of capital in order to reduce the value of your estate for Inheritance Tax purposes. Should you be moved, a gift to a Political Party would achieve the same end.
- If you chose to make a gift larger than £3,000 then as long as you survive a period of 7 years, that amount will be disregarded and will not be brought back into your Estate for tax purposes on your death. If you die within 7 years, then that gift will form part of your estate value at the time of your death. If the gift is large enough to attract Inheritance Tax in and of itself and you die within seven years of making it, then it may attract Taper Relief. The amount of relief increases the older the gift is until it reaches seven years. There is a common misconception that Taper Relief applies to all lifetime gifts, but this is not the case.
What is not so easily explained in law (or at all) is the question sometimes posed “should all grandchildren be treated equally?" And it is with the theme of the school event resonating in my mind that I attempt to provide my response.
Fair and equal
Grandparents have a difficult task in balancing what is fair and equal. For example, how can they spend equal time with their grandchildren when some of them live nearby and some a great distance away? What about tertiary education – one grandchild might take a vocational path and be self-supporting and the other might spend a decade in fee-paying education. Should these grandchildren be provided with equal financial support? What about the family business – a “fair” division might be to divide the ownership equally among children or grandchildren, regardless of their participation or interest in the business. Is that fair? Probably not, but it is equal.
Equal division is difficult at best, and with contested wills and contentious probate matters on the rise – it has become even harder to rest easy with the decisions one makes.
We have undoubtedly created a culture of expectation of inheritance and, with it, have grown a market for more robust estate planning. My profession operates at the heart of this market, and I have come to realise that there is no/can not be a perfect manuscript to deal with all these issues. Just remember – parity doesn't always mean equal.
For more information on any of the issues raised in this article, contact Rachael Stephenson on 0191 211 7886 or email [email protected]