Passing Assets to Children, or Grandchildren over the age of 18

We are often asked by clients as to the implication of passing assets to children and grandchildren (who are over 18 years old).  

We are often asked what tax considerations should they be aware of before making this decision? 

As an example, therefore, we comment on one particularly case where assets were to be passed to grandchildren, including a property portfolio. 

Whilst this is not technically our concern, a matter of company policy would be to bring to the attention of the person wishing to make the gift, that a common concern is expressed that the children risk having too much too soon, for example in their twenties,  potentially ruining a growing work ethic. 

In this instance, and in this scenario, practical considerations cannot be separated from the tax considerations, in fact they concern tax considerations. The point we are making is that the whole scenario of making gifts, for whatever reason, should be carefully considered, and also in our experience, discussed frankly and openly with the family, including the potential gifts. 

In this instance the person making the gift can have the usual standard Inheritance Tax (IHT) exemption, (an annual £3,000 exemption, a surplus income exemption, and gifts on marriage). The easiest estate planning is to give the assets away, and survive for seven years. The value of the gift then falls out of the donor’s estate (the person making the gift for IHT purposes). 

If the donor dies within the seven years, any value above the donor’s available nil rate band (£325,000) (subject also to the main residency exemption), is subject to IHT at 40%. 

However, IHT tapers to as low as 8% after six years, depending on the amount of time that has lapsed since the gift was given. Even if the donor is worried about surviving seven years, it is worth getting the clock running to maximise the benefit from any discount as soon as possible. 

The outright gift is a disposal for Capital Gains Tax (CGT) purposes by the donor. Assuming the donor is a higher rate taxpayer, gains will be taxed at 20% on the commercial property, or 28% on residential property.  

Paying CGT even at 28% and surviving seven years, so there is no IHT charge, is less costly than the 40% IHT on death. 

Parents worried about their children access to capital might suggest using a Trust, allowing the grandchildren and some benefit, but leaving control of the capital to the trustees, who could include the parents. 

The drawback is an upfront inheritance tax charge of 20% at lifetime rates, raised to 40% if the grandparent dies within seven years. 

A gift into Trust is again a disposal for CGT purposes. Instead of the grandparent paying CGT, he or she and Trustees can elect for the gain to be held over, meaning the trust takes the property at the grandparents acquisition value. They will pay CGT when a later disposal is made, whether by sales or passing the property to another beneficiary. 

The grandparent needs to have three important conversations; 

  • The first be with a financial advisor to discuss the affordability; 
  • With parents of the grandchildren; 
  • With a suitably qualified person who is capable of drafting the will. 

CGT is often missed in consideration when considering gifts, but as the gift counts as a disposal for CGT purposes. Giving cash is straight forward because there will be no gain. 

But the value of other assets could have risen significantly since they were acquired. 

There are circumstances in which there is CGT relief, for example where the subject of the gift is your main home – or deferral when the assets are business or agricultural assets. 

Your real estate portfolio, or more practically the property portfolio, is of particular concern if the properties have been held for a long time. Properties with little or no gain should be gifted ahead of those with bigger later gains. 

It may be possible to give one or more properties gradually over time, ensuring again relating to the portion given in each tax year, falls within the annual CGT allowance, currently £12,000. 

A further tax to consider in relation to property portfolios is stamp duty (LDLT). There is no SDLT on gifts. However, if a property is gifted subject to a mortgage, then SDLT is charged on the amount of the outstanding mortgage.  

Please do not hesitate to contact us.