HMRC warning for parents who haven't kept 'detailed record' of gifts to children

An HMRC warning has been issued for parents who haven't kept "detailed records" of gifts to children. A little-known rule could theoretically enable parents to leave as much money as they like to their kids without having to pay inheritance tax.

But parents will need to keep clear and concise records of the amounts they are donating to their children, along with their income and expenditures for the rule to be valid. Each parent has an inheritance tax allowance that nominally permits them to make gifts of up to £3,000 tax free every fiscal year. As per the information provided by the UK government on its official website: "You can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate. This is known as your 'annual exemption'.

"You can give gifts or money up to £3,000 to one person or split the £3,000 between several people. You can carry any unused annual exemption forward to the next tax year - but only for one tax year."

Myron Jobson is a financial expert and senior manager at Rathbones, often asked to give advice on how people can better manage their finances. He claims there is a way for parents to leave more cash to their kids without having to pay inheritance tax.

"It is becoming increasingly clear that a bitter cocktail of tax rises and public spending cuts will be the order of the day at the next fiscal event in October to get the nation's finances back on an even keel," he said. "With tax rises seemingly on the horizon, effective tax planning has never been more crucial.

"Now is the time to evaluate and take steps to bolster your tax position and make the most of the allowances available to you."

The financial expert then went on to outline a way parents can maximise tax-free gifts to their kids. "You can give away as much money as you like - without worrying about IHT - so long as payments are regular, and you can afford to make them from your normal expenditure," he explained.

"This can be a game-changer in estate planning. The gifts must form a regular pattern. This means the giving needs to be regular - whether that's monthly, quarterly, or annually. Sporadic gifts are unlikely to pass muster.

"These gifts must come from your income, not from your capital. After making the gift, you should have enough income left over to maintain your usual standard of living.

"These demands mean that if you want your gifts to be exempt from IHT, the onus is on you to ensure that the executors of your will have all the information they need to satisfy HMRC. This means keeping detailed records of your income, outgoings, and the gifts themselves."

The UK government has a website that gives more information about inheritance tax rules. People can also seek independent advice from tax specialists where appropriate.