With property prices predicted to rise yet again in 2016, for many young people, the challenge of getting on the housing ladder will be an insurmountable one.
The only realistic solution is, bluntly, to wait for their parents or grandparents to die and hope they inherit enough to give them a decent sized deposit for a house.
However, IHT can potentially take 40% of legacy, taking away much of the benefit.
One solution would be for the grandparents to start making gifts during their lifetime. Here’s a scenario, using an illustrative gift amount of £8,000, that could see the amount net benefit rise from £4,800 to £14,051:
- Two grandparents make a gift of £3,000 each, £6,000, being their annual IHT exemptions
- They top this up by an extra £2,000, also exempt from IHT under the normal expenditure out of income rules
- This £8,000 is gifted to their son’s pension, where it is grossed up for tax by £2,000
- As a higher rate taxpayer, their son* (or daughter) also gets a £2,000 tax refund
- The £10,000 gross pension contribution reduces the son’s income so he no longer loses the £2,051 child allowance for his three young children
The total amount available is £14,051, compared with only £4,800 that would be left after paying 40% IHT on a £8000 legacy – a £9,251 saving!
In theory, this can be repeated every year.
Note that the immediate cash benefit to the son is only £4,051 and the other £10,000 is in the pension. However, at age 55, the son can take out 25% of his pension tax free. So if his existing pension is worth at least £30,000, the gifted £10,000 can come out tax free.
Also note that if the son dies before reaching the age of 75, under the new IHT rules for pensions, the value of the fund may pass tax free to his beneficiaries.
The amounts above have been chosen to emphasise the benefits, and of course there are numerous rules and conditions attached to this advice, so please speak to an IFA and someone at K&H for specific advice before taking any action.
* son or daughter