Giving money to my children to avoid tax

If he were 18 years old or greater then what you are suggesting is perfectly legal, however a "child" under 18 cannot have assets given to him/her by a parent which produce greater than I believe 100 per year of interest otherwise it is deemed that the parent has avoided income tax on their own income bearing assets.

If you say your assets are not large enough to incurr inheritance tax then the 7 years rule on potentially exempt gift transfers is not relevant.

Dont forget...there is still the (IHT) exempt gifts which you can give (and your wife if you are married) of 3k each to the child. Always wise to use your annual exemptions...after all you may win the lottery and that will change your IHT position.

You child can give you money back if you need it.

One thing to watch out for though...if in the future you become old and frail (as we all must in the end) then if you need social services, whether this be a home care assistance or nursing home care then you will be asked on the application form if you have given money away and why because effectively by so doing you have divested yourself of the ability to pay for services. Best to give regular small amounts rather than big lump sums, (unless of course it is for a house purchase).

Many thanks BGB, Very helpful. Tony

Consider gifts out of income instead

Daytona

Ah yes...I had forgotten that one...as long as you have sufficient not to deprive yourself.

You mention that if you receive more then 100 in interest then this is not viable.

What about Islamic accounts where no interest is received?

Not sure about Islamic accounts I am afraid... I am not an expert other than for some years my father and mother used to transfer funds to me.... and now my daughter is over 18 I am now transferring funds to her.

I'm confused (what's new) .. is the 3000 gift allowance tax (income) deductable? mikej

No, it's not deductible against income tax, but against inheritance tax.

The way it works is that any gifts which you make (other than out of income) in the last 7 years of your life will be treated for IHT purposes as part of your estate. That is to say, giving stuff away does not escape IHT unless done more than 7 years before death.

There are exceptions to this, namely that each year you can give away £100 each to as many people as you like, plus £3000 in total to any other people, which won't then be clawed back into your estate upon death. All charitable gifts are also disregarded, and there's a separate wedding gift allowance for children or grandchildren.

----- Original Message ----- From: "Ronald Raygun" Newsgroups: uk.finance Sent: Friday, April 13, 2007 11:04 AM Subject: Re: Giving money to my children to avoid tax

Thanks - getting less confused but you next paragraph pins down what is probably troubling me....

Its the "out of income" part. So the 3000 max is out of taxed income? And there is an option to gift money out of untaxed income? mikej

Bitstring , from the wonderful person eclipse said

No, the £3000 max is from your Êpital=resources. I.e. money/shares/whatever you already have in the bank (and have probably paid tax on).

You can give =any amount= you like from your (tax paid) income as long as it doesn't materially impact your standard of living. I.e. if you earn £500K a year but have always live off a mere £100k, then you can give the extra away without it counting as a capital (i.e. possibly subject to IHT) transfer.

You may have to fight with your taxman if large sums are involved.

What do you mean 'untaxed income'? You can put untaxed income into a pension fund, for a spouse as well as yourself, but the way you do that is by reclaiming the tax afterwards .. the taxman doesn't believe in you getting untaxed income directly. 8>.

Yes. The inheritance taxability assumes you are giving away assets or savings, but if you give away part of your income stream without this seriously affecting your standard of living, these gifts will not be subject to IHT. I'm not sure what the tests are which determine effect on standard of living, but I guess it would be whether the effect is to erode your savings. Any income you give away which would mean you would have to live off savings would not qualify for IHT exemption.

Not really, except to charities, and the way this usually works is that you gift out of taxed income, and the charity then reclaims from the taxman the tax you have already paid, assuming you are a standard rate taxpayer. So if you earn £100 and pay £22 tax, you have £78 left. If you give these £78 to charity, it reclaims £22 from the taxman.

If you're a higher rate taxpayer, it's little more complicated and you get some tax back. If you earn £100 and pay £40 tax, it should only cost you £60 to make sure the charity gets £100. But the charity doesn't know your tax status and assumes you're at standard rate, so the only way it can get £100 is for you to give them £78 and to claim £22 from the taxman. So you do that and reclaim the missing £18 from the taxman yourself.

Got it --- -I think.

So the principle is you can give away your income but not your existing assets with no inheritance tax implications - apart from if you didn't give it away it would probably add to your estate.

This is a very weird idea - wealth I've accumulated I can't give away without IHT but money I'm earning now I can give away as it isn't part of my accumulated wealth.

No wonder I'm confused. Thanks. mikej

The taxman will have you at a disadvantage. How much of a fight can you put up when you're dead?

:-)

Depends when it happens I guess. (ObSF: _Hitch Hikers's Guide to the Galaxy_ .. probably _The Restaurant at the End of the Universe_ iirc, where someone was spending a year dead for tax reasons?).

Get your state vector properly uploaded into appropriate hardware** and you could run much faster than the average tax department operative.

(** an abacus would probably do).

"Ronald Raygun" wrote

Hmmm. You could quite easily have been living off savings, with very little actual income (and have enough remaining savings to be able to continue this for many more years) -- and then start earning some income (for whatever reason).

In this situation, the income is *not* required to keep the same standard of living, although the savings would (continue to) be eroded...

Could you give up this new income, "IHT-free", even though you are eroding your savings?

I'm neither a accountant nor lawyer but I would have thought that its okay to give away income even if you then erode your savings _providing_ you're not eroding them at rate that would ever jeopdise your standard of living.

But like someone said, you might have to argue it.

Yes, I would have thought so.

"Ronald Raygun" wrote

Then would you like to revise your suggestion that: "Any income you give away which would mean you would have to live off savings would not qualify..." ?

Perhaps. I might insert the word "instead" in an appropriate location, to clarify that only income which is diverted from a previous role of supporting your cost of living should be disqualified.

On the other hand, you can't be sure you'd get away with it. The greedy taxman could well take the view (but would need to justify it if challenged) that even if you have been living off savings to support your lifestyle, and then came into a new source of income, that the new income would then be deemed to be supporting your lifestyle to the extent that it isn't then causing your savings to grow.

What do *you* think?