In these difficult times you may be considering how you can help family members financially. Whilst tax will not be at the forefront of such thoughts, it is nevertheless a potentially large expense that should at least be considered.
The easiest way is to use your tax free gift allowance – up to £3,000 a year, or £6,000 if you did not use the previous year’s allowance. So you may be able to gift £6,000 by 5 April and a further £3,000 after that date with no inheritance tax implications – that is up to £9,000 or indeed £18,000 for a couple. Subject to certain rules, gifts of surplus income can also be made.
Inheritance tax does not usually apply directly to lifetime gifts, except sometimes to a trust fund. However they can ultimately incur a tax charge, for example if you do not survive for seven years following the gift. There are however a number of allowances and reliefs that may apply, such as those mentioned above, meaning that by careful planning the burden of inheritance tax can be reduced on lifetime gifts.
If you are gifting assets, or selling them to raise funds, then there may be capital gains tax to pay. The rules for residential property gains change on 6 April 2020 both by restricting certain tax reliefs but also by accelerating reporting and paying taxes. In some cases acting prior to that date may be beneficial. With some thought, perhaps in choice of assets, timing or even other investment it may be possible to mitigate some of the tax that may become due.
Some people are worried about gifting assets or substantial sums to the family as they fear the divorce or bankruptcy of a family member, or perhaps there are doubts over their financial acumen. In such cases a family trust may offer some asset protection and retained control.
You may wish to purchase an asset off a family member, to get some cash to them. For tax purposes they will be treated as having sold it for market value irrespective of what you actually pay them, so consideration will need to be given to their capital gains tax position. Some assets are not chargeable to tax on disposal. If the asset is land or property then stamp duty land tax may be payable on the purchase. There may be an element of gift by either party if market value is not paid, please see comments above about gifting.
You may consider lending money to somebody. If you do, ensure that it is correctly documented. If interest is charged then that will be taxable income on receipt, though depending on your overall income and any other interest you receive it may be at least partly taxed at 0%. There may be inheritance tax considerations if the loan is subsequently written off.
Tax can be complicated, but our experts at PKF Francis Clark are here to help avoid any unpleasant surprises arising from your desire to help your family.