Inheritance tax for teenagers

Minor bequest

Passing your wealth on to your children is standard inheritance tax (IHT) planning. The theory is simply that you’ll be first in line for IHT, so passing it on to them means there will be less for HMRC. Not a cheery subject, but then neither is having a large chunk of your estate disappear in tax. But making a gift to your own child is not as simple as paying £10,000 into an account for your five year old and forgetting about it.

Legal necessity

While assets can be owned by children, i.e. those under the age of 18 (excluding those who are 16 plus and married), they can’t legally hold them in their own name, they must be registered in the name of an adult. So if you make a gift of, say, shares or set up a bank account for your child, you’ll have to include your name on the register.

Trap. For some taxes HMRC will still treat money or assets you give to your children as yours until they reach 18.

IHT treatment

For IHT, a gift to your child will result in the value leaving your estate and falling into theirs. From an IHT point of view that’s good news; the gift won’t count for IHT immediately, the usual rule for gifts between individuals applies.

Survive or pay the tax

For gifts not covered by an IHT exemption you have to survive seven years from the date of the gift in order that they become exempt. For example, you made gifts to your child worth £50,000 in total, the last of which was seven years ago. Your youngster is now off to university and the idea is that they will use the money to fund their education rather than having to borrow. By making the gifts you’ve reduced your estate and potentially deprived HMRC of up to £20,000 (£50,000 x 40%). But if tragedy strikes, this tax saving can be lost.

First will

It’s an unpleasant thought but you need to consider what the IHT consequences are if your youngster meets an early death. It’s pretty certain they won’t have made a will. Anyone dying without one dies “intestate”, and their assets pass according to strict rules. In the case of minors and unmarried adults with no children the rule is supremely simple: all their assets pass to their parents, in other words you, thus bolstering your estate and reversing the effect of your IHT planning. This will be the last thing you’ll want to think about at such a time. The solution is to plan not just your estate but also that of your children.

Tip 1. If your young adult is lucky enough to have a reasonable pot of wealth, whether it came from you or others, persuade them to make a will as soon after they turn 18 as possible - even if you have to pay for it!

Tip 2. When making gifts of significant value to your children while they’re still minors, do it via a simple trust which names other beneficiaries, e.g. brothers, sisters, cousins etc., who will inherit their estate rather than it passing back to you under the rules of intestacy.

For more advice on Inheritance Tax, please don't hesitate to contact us!

Inheritance tax for teenagers

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