Inheritance tax: How to help your children buy a house and lower your bill

Inheritance tax explained by Interactive Investor expert

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Parents and grandparents may be able to help grown up children buy a house without handing all their earnings to HM Revenue and Customs (HMRC). What’s more it could also reduce their inheritance tax bill and leave them with more money to spend.

However, anything above £3,000 could be subject to a hefty inheritance tax (IHT) bill of 40 percent.

That said, there are some ways to increase this allowance and avoid paying IHT altogether.

When it comes to inheritance tax even experts agree that it’s a tricky subject with thousands of people falling foul every year.

However, some suggest setting up a trust to reduce how much IHT someone has to pay.

Gifting is also considered to be one of the best ways to reduce IHT as it can help mitigate tax as well as passing wealth on to loved ones.

Charlotte Corr, financial planner at Old Mill told that trusts are worth considering.

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Ms Corr said: “Trusts enable you to give cash, property or investments to somebody else to look after for the benefit of a third party.

“When you create a trust, there will be a trustee (who owns and manages the assets in the trust) and a beneficiary or beneficiaries (the person or people that the trust is set up for).

“Often, they are unable to manage it themselves due to age, disability, etc.

“Once assets are put in a trust they no longer belong to you, and this is how they are tax efficient.”

Due to the complex nature of inheritance tax and trusts, it could be a good idea to seek the guidance of an independent financial advisor before going down this route.

It certainly pays to brush up on the rules, thresholds and allowances as collectively the nation gave away £125million in “unnecessary” IHT in 2020.

Britons can choose to give gifts seven years before they die which would be classed as Potentially Exempt Transfers.

They may also want to make the most of cash allowances – people can gift up to £3,000 per tax year as well as small gifts of £250 or less.

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As wedding season approaches it’s also worth bearing in mind that taxpayers can give wedding and civil partnership gifts.

This could enable them to give an additional £5,000 without being subject to IHT.

They can also carry over an allowance from a previous year if it’s not been used already.

For example, a parent could gift their child up to £11,000 tax free in one year – a £5,000 gift made in consideration of marriage plus this year’s £3,000 annual exemption and last year’s if it hasn’t been used already.

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