Richard, 79, from Cheshire, took early retirement at 58 on a generous final salary pension. He and his wife own their home outright, but he has always refused to help his 39-year-old son buy a property, believing in hard work over handouts. Now, his financial adviser has suggested that gifting money could reduce a significant inheritance tax (IHT) bill, prompting Richard to reconsider.
The Dilemma: Values vs. Tax Savings
Richard's son works in the arts, earns little, and rents a flat in Manchester. He has asked for help for years. Richard says: "We worked hard for what we have and we believe he should do the same." However, the adviser warned that the estate will face a hefty IHT bill on death. Gifting now could cut that liability. Richard asks: "Is this a legitimate strategy, and does it make us terrible parents for only doing it for tax reasons?"
How Gifting Can Reduce Inheritance Tax
Consumer champion Sarah Davidson explains that the strategy is legitimate. Under HMRC rules, you can give away up to £3,000 each tax year without it being added to your estate (the annual exemption). Unused exemption can be carried forward one year, so Richard and his wife could potentially gift £12,000 tax-free immediately.
For larger gifts, such as a house deposit, the amount above the exemption becomes a 'potentially exempt transfer' (PET). To escape IHT entirely, the donor must survive seven years after the gift. If death occurs within three years, the full amount is taxed at 40%. Between three and seven years, a tapered rate applies: 32% in year four, 8% in year six, and zero after seven years.
Practical Steps for Gifting
Davidson advises that if Richard proceeds, he must sign a 'gift letter' for his son's mortgage lender, confirming the money is a non-refundable gift with no legal interest in the property. The gift cannot have strings attached or be reclaimed later. She notes: "It's also worth remembering that the world you and your wife worked in is not the world your son is dealing with today."
Emotional vs. Financial Decisions
Davidson concludes: "Money rarely sits well with emotional or moral choices... From a purely financial perspective, your adviser is absolutely right." She adds that while it may not be the warmest parenting moment, it is a pragmatic one: the son gets home security, and the parents keep wealth from the Treasury.
