Giving money away is not as straightforward as you might think, an expert has warned.
And that applies whether you are something of a philanthropist or simply helping out the children.
Failure to do it correctly could cause problems for the family after your death with HM Revenue & Customs, cautions Martin Green, head of the private client team at Stratford-upon-Avonlaw firm Lodders.
That could mean considerable expense and a higher inheritance tax bill.
Up to £3,000 of capital can be given away each year and be exempt from IHT. Above that and you need to live for seven years to avoid being caught out. Also, if you have a surplus income, and regularly make gifts of the surplus, those gifts can be immediately exempt, but you will have to show that the income is surplus to your needs and establish a pattern of regularly gifting this surplus income. So keeping detailed records is vital.
To be surplus, having satisfied all your commitments, you need to be left with sufficient income to maintain your usual standard of living. Income means net income after income tax.
But Mr Green notes that HMRC is increasingly querying claims for the exemption and asking for proof that they were indeed out of surplus income.
“In my case I can just about work out what my expenditure was in last month’s bank statement, but as an executor for someone else how easy will it be to get to the bottom of expenditure made so long ago? The moral is that if you are making gifts you should keep detailed annual records of all expenditure alongside your other tax information.
“This will save your estate after you have died, not only cost, but also delay in having to carry out almost a forensic accounting exercise in relation to your expenditure.
“You do not have to do anything with this information during your lifetime save that your executors need to be aware of it and you might decide to keep copies with your will.”
And, he added, there was another reason why this was so important.
“With public finances in such disarray, and the possibility of a more generous tax free band, future governments are likely to look even more closely at claims for exemptions. The message is – keep detailed records of your annual income and outgoings so that a pattern can be established.”