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HMRC have confirmed that gifts by parents and grandparents to children under 18 will not be subject to a new inheritance tax charge.

The uncertainties concerning IHT and gifts to children first arose following the 2006 Budget when changes to the taxation of trusts were announced. There were fears that gifts to children would be subject to a different tax regime from similar gifts to adults. Under one interpretation of the new measures, a gift to a child would be subject to an immediate inheritance tax (IHT) charge at 20%.

For example, where a grandparent gave cash to a grandchild, under the new legislation, some tax experts thought a tax charge may have arisen at the rate of 20% where such a gift exceeded the grandparent's unused IHT nil rate band (£285,000 for 2006/07). In addition, the gifted property could have been subject to ongoing tax charges of 6% every ten years.

Fortunately, HMRC have now confirmed that gifts to children will not be taxed differently from gifts to adults. Provided the gift is outright and not subject to any form of contingency or trust there is no tax payable if the donor survives seven years from the gift. If the donor dies within seven years there will still be a charge (as with adults). In addition, there will be no ongoing IHT charges.

Commenting on this clarificaton, Emma Chamberlain, Chairman of The Chartered Institute of Taxation’s Capital Taxes Sub-Committee, said "HMRC have given a clear response to the questions that have been raised and so those who are happy to make outright gifts to children can do so without incurring any additional IHT penalty."

The gifted property will, however, be part of the child's estate so he will be able to take over the property at 18 and if he dies the property will pass according to his will or intestacy.

Parents may of course decide to be careful before allowing a large sum to be held by young children in such an unrestricted way and may prefer to impose some controls so that the child cannot obtain unrestricted access at 18, even if this involves paying more IHT.

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CIOT: HMRC confirm gifts to children not subject to more (or higher) inheritance tax