Parents give money early to save on inheritance tax

Parents and grandparents are transferring assets to family members to try to reduce the amount of tax payable on their estates, according to new research.

A survey carried out on behalf of Direct Line Life Insurance found that parents in the UK have transferred £227bn to their children in an attempt to reduce or avoid an inheritance tax bill.

One in five (20%) parents have already gifted money to their families, and another 19% have not yet transferred any assets but plan to do so in the future.

The average value of assets transferred to children early is £32,920.

One in seven (15%) divorcees said they had already transferred funds to their children or had placed money in trust, to prevent it going to a new partner when they die. Another 37% of divorcees plan to transfer money in the future if they remarry.

Inheritance tax is currently charged at 40% on estates worth more than £325,000. However, money can be gifted to family and friends during your lifetime — and as long as you remain alive for the next seven years after the gift is made, that transfer is free of inheritance tax.

There is also a £3,000 annual exemption which means that gifts adding up to less than £3,000 in a year are free of inheritance tax, regardless of when you die.

Jane Morgan, business manager at Direct Line Life Insurance, said: “Worrying about what happens to your children when you’re no longer around is natural for any parent and it is understandable that people want to maximise the money they leave behind. However, it is important that people planning to transfer money understand the tax implications that a gift might give rise to.

“With almost one in ten (9%) parents placing their assets into trust, this is something people should also consider when arranging their life insurance.”

Placing a life insurance policy into a trust could help avoid payments being included in inheritance tax calculations, Morgan explained.

“However, despite this, just 20% of people with a life insurance policy have placed this into trust and almost a fifth of those with a life insurance policy admit they did not know this was an option.”