Question
I am looking to reduce the IHT liability for my two children (both now over the age of 18) upon my death. My husband passed away a few years ago leaving a sizeable estate behind to me.
After our combined NRB, I anticipate a sizeable IHT liability remaining. I am looking at several ways of reducing the eventual IHT liability. But one area which I can find no information on and would appreciate your advice is as follows:
One of my sons is still in full time education. I note that HMRC allow me to provide maintenance for children over the age of 18 still in full time education - as I understand it, this falls outside of IHT and will not impact upon any other allowances.
Can I confirm the following:
What counts as maintenance?
I assume paying his university fees certainly counts, what about providing food and accommodation?
What limits are there on this and for how long?
For example, if I decide to buy him a flat to live in, will this qualify as maintenance - and what happens when he stops being a student?
Can I pay his rent to live in a flat?
Many thanks in advance for any advice you can provide on the matter!Answer
HMRC doesn't give a clear definition of maintenance, but in practice it means covering education costs and reasonable living expenses. So yes, university fees definitely count, as would rent and an allowance for food and general living costs.
You can make the maintenance payments for as long as your son is in full-time education and there's no explicit limit. But, as ever with HMRC, it boils down to what's considered reasonable (should they ever take a close look). For example, rent on typical student accommodation and a few hundred pounds a month to cover food, books, bills and other living expenses should be absolutely fine. But put him up in a penthouse apartment with a hefty expense account and HMRC may well object, deeming that some of the money should be treated as a gift (in which case you'd need to live for at least 7 years thereafter for it to fall outside of your estate).
Buying your son a flat wouldn't count as maintenance, assuming you are the owner it would remain in your estate. If you buy the flat for your son and he owns it then it would be treated as a gift, hence fall outside your estate after 7 years provided you're still alive. But you wouldn't be able to receive any benefit from the flat, for example living there in future without paying full market rent, otherwise HMRC would view it as a gift 'with reservation' and effectively void it.
If you pay rent and university fees it's best if you pay them directly. And for living costs perhaps pay a set amount each month into your son's bank account. Aside from keeping things simple, it also provides a good audit trail should HMRC ever want to take a closer look.
Another IHT allowance that might be relevant is gifts from normal expenditure immediately falling outside of your estate. This means regular gifts made out of your taxable income rather than capital. So, for example, if you have surplus pension/investment income you can afford to give away, this could be passed to your children without having to wait the usual 7 years for it to fall outside of your estate.
As I'm sure you're aware gifts totalling £3,000 a year fall outside your estate immediately, as do As many gifts of £250 per person you wish to make each tax year..
If you want to make large gifts and retain some control over when and how your children get access to the money or assets you can use trusts. But they make things more complex and don't get round the 7 year rule previously mentioned.
Best wishes and good luck with your planning.
I am looking to reduce the IHT liability for my two children (both now over the age of 18) upon my death. My husband passed away a few years ago leaving a sizeable estate behind to me.
After our combined NRB, I anticipate a sizeable IHT liability remaining. I am looking at several ways of reducing the eventual IHT liability. But one area which I can find no information on and would appreciate your advice is as follows:
One of my sons is still in full time education. I note that HMRC allow me to provide maintenance for children over the age of 18 still in full time education - as I understand it, this falls outside of IHT and will not impact upon any other allowances.
Can I confirm the following:
What counts as maintenance?
I assume paying his university fees certainly counts, what about providing food and accommodation?
What limits are there on this and for how long?
For example, if I decide to buy him a flat to live in, will this qualify as maintenance - and what happens when he stops being a student?
Can I pay his rent to live in a flat?
Many thanks in advance for any advice you can provide on the matter!Answer
HMRC doesn't give a clear definition of maintenance, but in practice it means covering education costs and reasonable living expenses. So yes, university fees definitely count, as would rent and an allowance for food and general living costs.
You can make the maintenance payments for as long as your son is in full-time education and there's no explicit limit. But, as ever with HMRC, it boils down to what's considered reasonable (should they ever take a close look). For example, rent on typical student accommodation and a few hundred pounds a month to cover food, books, bills and other living expenses should be absolutely fine. But put him up in a penthouse apartment with a hefty expense account and HMRC may well object, deeming that some of the money should be treated as a gift (in which case you'd need to live for at least 7 years thereafter for it to fall outside of your estate).
Buying your son a flat wouldn't count as maintenance, assuming you are the owner it would remain in your estate. If you buy the flat for your son and he owns it then it would be treated as a gift, hence fall outside your estate after 7 years provided you're still alive. But you wouldn't be able to receive any benefit from the flat, for example living there in future without paying full market rent, otherwise HMRC would view it as a gift 'with reservation' and effectively void it.
If you pay rent and university fees it's best if you pay them directly. And for living costs perhaps pay a set amount each month into your son's bank account. Aside from keeping things simple, it also provides a good audit trail should HMRC ever want to take a closer look.
Another IHT allowance that might be relevant is gifts from normal expenditure immediately falling outside of your estate. This means regular gifts made out of your taxable income rather than capital. So, for example, if you have surplus pension/investment income you can afford to give away, this could be passed to your children without having to wait the usual 7 years for it to fall outside of your estate.
As I'm sure you're aware gifts totalling £3,000 a year fall outside your estate immediately, as do As many gifts of £250 per person you wish to make each tax year..
If you want to make large gifts and retain some control over when and how your children get access to the money or assets you can use trusts. But they make things more complex and don't get round the 7 year rule previously mentioned.
Best wishes and good luck with your planning.
Read this Q and A at http://www.candidmoney.com/askjustin/832/will-paying-sons-university-costs-reduce-future-iht-bill
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