Ask the expert: Will paying for my daughter’s wedding reduce my IHT bill?
Fidelity personal financial specialist Marianna Hunt is back on hand to answer your burning questions, and today a reader wants to know if paying for their daughter’s big day could reduce their IHT bill.
Q: My daughter is getting married. I understand that if my wife and I transferred her £15,000 for the costs of her wedding, that would be considered a gift for inheritance tax (IHT) purposes. But if I pay directly for my daughter’s wedding – so I contract the suppliers and meet their invoices, does this still count as a gift?
A: Weddings are expensive these days (I should know, I’m planning one), so it’s very generous of you to help your daughter with the costs. But this can be something of an IHT minefield.
You’re right: simply transferring your daughter £15,000 for her wedding would be seen as a gift for IHT purposes. But remember you should be able to make use of various gifting allowances available to cover some or all of this, unless you have already used them up.
For example, you and your wife should each be able to give away up to £3,000 each tax year without the gift being subject to IHT. This is known as the annual exemption. If one or both of you did not use up last year’s allowance, you can carry that forward, potentially allowing you to gift up to £6,000 each, or £12,000 total.
The gift exemption
There’s also the wedding gift exemption, which means you can give away up to £5,000 to your child IHT-free if they’re getting married. The exemption applies per donor, rather than per recipient, so between yourself and your wife, you could potentially gift up to £10,000.
For the wedding exemption, you need to gift the money on or shortly before the marriage or civil partnership.
You could combine the annual exemption with the wedding gift exemption, potentially enabling you to give away up to £22,000 IHT-free.
However, if you have both already used this year and last year’s annual exemption, you would only have access to the wedding allowance. That would leave £5,000 of the £15,000 gift not covered by an exemption.
This £5,000 gift might still be free of IHT provided you live another seven years after making the gift thanks to the seven-year rule.
Shrinking the bill?
But what about your question of paying the suppliers rather than gifting the money directly to your daughter?
Unfortunately, this is probably not the work-around you hope it might be. Although the money never passes through your daughter’s bank account, HMRC would generally regard paying suppliers on her behalf as a transfer of value. By settling expenses she would otherwise have had to pay, you’ve still made a gift for IHT purposes.
Instead, I would look at those gifting allowances mentioned above to help protect some or all of the gift from IHT.
IHT is a complex area of financial planning. If you’re unsure, speaking to a financial adviser can help you to explore your options and build a plan that suits you.
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