Since the recession saw the job market crash and house prices soar, more and more parents are having to support their children financially after they leave home. Although this has meant that many peoples’ savings have taken a hit, and others have even had to postpone their retirement, it is also a way for parents to avoid the dreaded inheritance tax, while helping their children to make their way in the world.
Parenthood is expensive, and it doesn’t necessarily get cheaper after the chicks have flown the nest. Research by Fidelity Personal Investing shows that the average amount that parents spend on their children after they leave home can be as much as £23,059; this money typically gets spent on mortgage deposits, rent, car deposits and weddings, with many parents also paying for food shopping and even covering credit card bills. It’s not just younger adults who need financial help either – in fact, 16-18 year olds are the group who needs the least support. This could be because people are moving out later in life, or because those studying at university are technically classed as living at home. The age range who need the most help are 30-39 year olds; these are the people who are struggling to raise a mortgage deposit, or simply cannot keep up with the cost of living due to soaring prices, while wages simply cannot keep up.
So how does supporting grown up children help people avoid inheritance tax? The answer lies in how inheritance tax works; IHT, or inheritance tax, is applicable when an individual is worth £325,000 or more when they die. This rises to £650,000 for a couple, at a rate of 40% on everything above the relevant threshold. Rising house prices mean that many people who paid basic rate tax all their lives will pay a higher rate on their estate, meaning that their relatives benefit far less from their inheritance.
One of way of avoiding IHT is to make sure that your estate is worth less than £325,000 when you die, which is where supporting adult children comes in. Money spent on helping a relative with the cost of living is IHT exempt; you can also give IHT free gifts of up to £3000 each calendar year. Similarly, you won’t pay inheritance tax on any gift that you bestow, so long as you live for at least seven years afterwards. Money used for weddings is also exempt, making it worthwhile for parents to pay for a child’s wedding, as they get to see the money being used and enjoyed, and know that the funds won’t be plundered when they have passed away.
Which steps are you taking to secure your children’s financial future?