A friend of mine recently forwarded this article to me, asking what the legal position is in relation to gifts to children, and if parents have an ability to ask for their money back.
In this scenario, a lady’s parents gifted her £100,000 to help her to buy her home. 10 years later, they have asked for the money back to enable them to buy a second home in Spain. There does not appear to have been any formal record of the gift/loan and the question arises as to whether she must repay the funds.
Firstly, it is important to understand the basic legal requirements for a gift: a person must give an item (or money) to another person, without any consideration (a fancy legal term meaning bargain), and without retaining a benefit.
In some instances, there is an automatic presumption at law that something was intended to be a gift. One such example would be when a parent gives money to a child. This assumption however can be rebutted if there is evidence to show that there was consideration or if it was intended to be a loan. For this reason, it is always best to record any gifts or loans in writing, so the position is clear to everyone involved.
Applying this to the limited facts in this article, the law would say that any large transfer between parent and child is presumed to be a gift unless evidence can be provided to the contrary. It will therefore be incumbent on the parents to produce that evidence although no doubt the daughter may also wish to prepare her own evidence of the intention if any exist. Normally a loan would have repayment terms and if the parents have not been seeking active repayment from the date of the loan, this will clearly help to build the picture that the sum was a true gift that the daughter is not under an obligation to return.
Gifting Rules in General
If an item or sum of money is gifted, it is treated as no longer belonging to the donor (person who makes a gift). For this reason, gifted items do not form part of the estate of the donor and making lifetime gifts can be a good form of inheritance tax planning (subject to the survivorship requirements set out below), if a person has disposable assets that they no longer need.
It is however important that only assets that are no longer needed by the donor should be gifted away. If an item is gifted, but the donor retains use of it, then this will be treated as a gift with a reservation of benefit and will be a failed gift for inheritance tax purposes. A classic example of a gift with a reservation of benefit is a parent transferring their home into their children’s names but continuing to live in the property without paying full market rent. This can lead to an array of negative tax implications and I would suggest you seek legal advice if you find yourself in this scenario.
Care also needs to be taken not to give away assets shortly before needing care. This can be treated as a deprivation of assets when a person is assessed by the Local Authority on their ability to pay towards the cost of their own care in which instance the gift may be reversed and its value used to pay for care fees.
As many people are aware, individuals can make gifts of up to £3,000 in each tax year without these having to be brought into account for inheritance tax purposes. You can also make unlimited gifts out of surplus income, however they must be regular and what HMRC consider to be income is fairly prescriptive so, again, advice should be sought if you wish to undertake this form of gifting. You can make gifts of more than £3,000 but these must be survived by 7 years. Gifts into trusts can trigger a longer survivorship period, known as the 7 to 14-year shadow.
If you die within 7 years of making a larger gift (or one that exceeds your annual allowance of £3,000) then this will use a proportion of your inheritance tax allowance. If the total gifts made within 7 years of the date of death exceed £325,000 then there may not be any inheritance tax allowance available to the estate on your death, and it is likely that tax will also be payable on the lifetime gift(s).
Applying all of the above to the limited facts in this article, the law would say that any large transfer between parent and child is presumed to be a gift unless evidence can be provided to the contrary. It will therefore be incumbent on the parents to produce that evidence although no doubt the daughter may also wish to prepare her own evidence of the intention (if any such evidence exists)! Normally a loan would have repayment terms and if the parents have not been seeking active repayment from the date of the loan, this will clearly help to build the picture that the sum was a true gift and that the daughter is not under an obligation to return it.
This is also a salutary lesson to all - only give away what you can afford to part with and always document large gifts or loans to avoid later disputes.
If you are considering making gifts to your children, then please do not hesitate to contact any member of our wealth management team for assistance.