Many parents are now giving early ‘inheritances’ to adult children to help them onto the property ladder, to set up businesses or cope with the cost-of-living crisis.

But the implications of such generous gifts could impact on parents’ own living standards in retirement and their inheritance tax planning.

Estates worth £325,000 or more are currently taxed at 40% on death, although no IHT usually applies on assets left to a surviving spouse or civil partner or on the first £325,000 of assets. There are also additional allowances that allow a two parent household to pass on a family home worth up to £1 million to children tax free. The Autumn Statement confirmed a freeze on those thresholds through to April 2028, further eroding values.

Money, or assets, given to children while parents are still living can fall outside of the IHT net, but this will depend on the size of the gift, and how long the donor subsequently lives.

Gifting structures

The simplest gift option is a ‘potentially exempt transfer’ (PET). This can be for any amount, and provided the parent lives a further seven years it is excluded from IHT.

There are also ‘chargeable lifetime transfers’ (CLT) for gifts made into trusts. If the value of the gift is below the IHT nil-rate band no IHT is due at that point. If the gift is over this level IHT is paid there and then, albeit at a reduced 20% rate, on the amount in excess of any exemptions and the nil rate band. If you live for a further seven years - without making further CLTs or PETs - no further IHT is due.

Complications arise though if you make further gifts within a seven-year period, even to different beneficiaries. If you die within seven years of making a PET or CLT, HMRC will also look at any chargeable transfers made in the previous seven years of that gift - effectively meaning some of them could impact your IHT liability for up to 14 years. This is a complex area so seek specialist tax advice.