It seems well known that if someone gives away assets from their estate and survives for 7 years thereafter, then the gift will fall outside of their estate and will not be brought into account for Inheritance Tax purposes on death (the ‘ 7-year rule’).
However, what about gifts made by parents for the maintenance and benefit of their children?
An ever increasing example of this is in relation to the payment of tuition fees, especially with the increase in University tuition fees. More and more parents are looking to assist their children financially, either in the payment of their children’s University tuition fees or in providing monies to assist with the cost of living whilst at University.
The Inheritance Tax rules are rather friendly in this regard, and state that if a gift is made by a parent to a child (including a stepchild) who is under the age of 18 or over the age of 18 but in full-time education or training, then the 7 year rule will not apply to that gift. Instead, the assets gifted automatically fall outside of their estate.
Whilst this can be highly beneficial in a time where University tuition fees can be in excess of £27,000, it is important to note that any child over the age of 18 receiving such a gift must be in full-time education or training. Studying a part-time course may not therefore qualify, and the parent making the gift would have to survive for 7 years after making the gift. Similarly, if parents are considering funding a gap year for their children who are over the age of 18, then this too will fall within the 7-year rule.
This can also cause problems if parents encourage their children to take a student loan to cover the cost of University tuition fees but decide at a later date to repay this on behalf of their children. If the repayment of the student loan were to take place after the child had left full-time education or training then this would also fall within the 7-year rule.
An alternative to this would be for the children to repay the loan and for their parents to reimburse them on a monthly basis out of excess income (if available) as this is another exemption to the 7-year rule. For more information on this, please read our article on lifetime giving.
This is another example of the complexity of the rules relating to lifetime giving and Inheritance Tax and is a gentle reminder for people to obtain professional advice in relation to Inheritance Tax and wider succession planning, especially in the context of entering into or reviewing their Wills and/or making lifetime gifts.
At Hay & Kilner we have a team of solicitors with specialist expertise in relation to estate planning and Inheritance Tax, who can advise on lifetime giving and the wider issues this entails.
For further information, please contact Alice Clewes, Partner at Hay & Kilner
Call: 0191 232 8345