Drawing out pension to give to son for house deposit. Tax❓

Off the top of my head:

Interest over £1k a year is taxable.

If it’s a gift, the gift isn’t taxable. If you don’t survive for 3 years after making the gift, it’s added to the value of your remaining estate. If that totals more than £325k, then 40% tax is due on anything over the £325k. If the total estate is less than £325k, no inheritance tax is payable. If you do make it past the 3 years, the gift value is taxed at a lower rate, depending on how long ago it was given. After 7 years, no tax is due on the gift value.

Disclaimer: I am an accountant, but this isn’t my area; I’ve just been looking into it for my dad…

Take financial advice, no point cutting your nose off to help your son if it makes you destitute in retirement, then he will feel bad.

Might be worth you having a frank conversation with your mum and seeing if she will gift the house to you 'right now', assuming she lives another 7 years that might play out well, as you could release some equity on the 300k house to loan your son some start-up money...

Or your mum could do the same but direct to the grandson.

But it's complex and everyones circumstances are different.

Assuming your mother is recepive to such an arrangement, then you and your mum should book an appointment with an estate and probate specialist solicitor.

I emphasize this is just my initial thought, and it's a horrible thing to talk about with family but there will have to be some frank conversations at some point, and better now then after someone dies.

I'm not an expert, by any stretch, but drawing down 20k from your pension in order to essentially give it to your son, when you are not a home owner yourself, doesn't strike me as the most efficient way of doing things.

Good luck!

IANAL

"So, son might accrue some interest on the £20k I give him whilst saving up more, he’ll need to pay tax on that, right? "

Why give him the £20k now if he isn't ready to buy?   Leave it growing tax free in your pension. Tell him it will be available once he has saved up the rest. 

Think you need professional advice which will incur a cost.
Don't be surprised if the first question is...mr poops, is this in your best interests and if you believe it is can you please explain how.

Might be worth you having a frank conversation with your mum and seeing if she will gift the house to you ‘right now’

and where is mum going to live?

You can’t ‘gift’ a house and continue to reside without paying fair market rate for rent. HMRC aren’t that daft.

Agree with others here, time the withdrawal so that it is given to your son just in time: it’s better sat in your pension than his account. However. If you must withdraw early, your son can put it in an ISA tax free (up to £20k year.)

If you are still paying into another pension it has tax implications if you are paying in more than £10K a year and take out more than £10K, something I didn't realise until I withdraw all the money out of an old pension I had for a couple of years. If I had taken advice I would have just taken the tax free part!

You can get free advice here --> https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise

Another thing worth considering is a LISA, assuming he’s under 40 and not previously owned a home. He’ll accrue much more interest (25% govt uplift) on top of what the ISA naturally gains. You could drip feed 4k in a year, whilst keeping the bulk of your pension in tact. I believe you could combine right to buy LISAs with a partner for double the impact. There is an upper limit though on house price purchase where you’re unable to access the cash if the house is above 450,000. 

Yes the lisa would be perfect and the govt uplift welcome.

Listen to the meaningful money podcast on iht and gifting money, the one released last week, he basically says don't gift money that will materially affect your lifestyle.  

If they're not ready to buy yet, do nothing.

When they are ready, have a re-think.

The 'catalyst' might be when your Mum passes, then it could be you've the funds then - or even better get her to Will it too him directly.

You obviously know your son far better than any of us, but...

Having £20k sat in the bank before he's ready to buy - that £20k can easily get spent

https://www.gov.uk/inheritance-tax/gifts

If you don't live 7 years it will be taxed as inheritance tax, albeit subject to a sliding scale. Given that inheritance tax starts at £325K and £500K if it includes property, I doubt you have much to worry about from what you've said.

That said, you might as well hang onto it until he's ready to buy as circumstances can change and pensions are well insulated from tax until you take them.

Some great advice there chaps, some things I hadn't thought of, thanks.

Got an appointment with Pension wise later today, I booked a few weeks back.

Hang on as long as possible until the money is needed, but 25% is tax free (to you), you'll pay tax on the rest. Son won't pay anything as it's a gift, but you need to be around for 7 years.  Pension's adviser best person to speak to.

Think it's been covered. Give him the money when he needs it, the only possible tax issue is IHT and it's unlikely to arise, and even if it turns out to, he's still got a house sooner than he would otherwise and the tax will only be a trivial penalty out of a massive inheritance (cos you only pay IHT if you get a massive inheritance in the first place).

Since you are over 55, you may be able to draw down 25% of your pension fund tax free and become a pensioner. This has implications for amount you can save in the future tax free (10k/yr). I would consider this and the remainder as the deposit on a house, which you can own a part of and then gift to your son at a later date. IHT won’t be an issue for your estate and the rent saved now will give returns greater than any future investments you might make

I would also seek financial advice.

Since you are over 55, you may be able to draw down 25% of your pension fund tax free and become a pensioner. This has implications for amount you can save in the future tax free (10k/yr). I would consider this and the remainder as the deposit on a house, which you can own a part of and then gift to your son at a later date. IHT won’t be an issue for your estate and the rent saved now will give returns greater than any future investments you might make

Probably not relevant to the OP, but I've always wondered who gets the liability for IHT?  Obviously in many cases the early recipient of the gift and the beneficiaries of the estate are the same people so it doesn't make much difference, but theoretically if you gave your son money but left your estate to the donkey sanctuary, am I right in thinking that the IHT is paid by the executors from the estate and there's no liability for the Son? Just less money for Donkeys?

I would also seek financial advice.

I absolutely loath IFAs.  There's none I've met who I actually want to share a coffee with, never mind the deepest personal information or my life plans.  I would put them in the same camp as car salesmen and double glazing people.  There must be good ones, but given most get some incentive from the stuff they persuade you to do, its really hard to see them as impartial.  Even if you pay for advice, they are still selling you something which means they have an incentive to make their advice seem more valuable, products more complicated, etc.  I think my personal distrust of them is embedded in their desire to see things through purely black and white numbers on a spreadsheet basis.

Despite all of that - if I was in the OP's shoes I'd want to get some proper financial advice.  I can see the desire to help out, but it feels like it may be unwise.

Could you not buy a house yourself, using the 20K from the pension and let your son rent it from you at a rate where he has enough left over to save for himself. Further down the line sell/gift it to him.

Any Inheritance Tax due on gifts is usually paid by the estate, unless you give away more than £325,000 in gifts in the 7 years before your death. Once you’ve given away more than £325,000, anyone who gets a gift from you in those 7 years will have to pay Inheritance Tax on their gift.

(It's a moot point if the recipient of the gift is the sole beneficiary of the will.)

Thanks for the further thoughts and info.

Annoyingly my pension provider says I have to seek the paid for advice of an independent financial adviser and provide proof of doing so. Even though I know exactly what I want to do and his/her advice will change nothing but it's government mandated apparently. I see the logic though, just a little annoying to have to pay hundreds no doubt to have a bit of a chat.

Could you and son jointly buy a house, even if he is only resident of it?

LISA works - one of mine has maxed his this year. Free £1k from government, tick...

Poopscoop, your pension providers response would suggest you have some form of safeguarded benefits (e.g. defined benefits or other guarantees). Probably a good idea to understand what those are before you make any decision on what to do.

As ever there's some really dodgy advice being given.

Here's mine to add to the problem 🙂 .

Could you not buy a house yourself, using the 20K from the pension and let your son rent it from you at a rate where he has enough left over to save for himself. Further down the line sell/gift it to him.

Don't do this. You'll get stung for second home surcharge.
And potentially CGT, and maybe even income tax and stamp duty again ( though I doubt the last bit)

Give him the money when he needs it, the only possible tax issue is IHT and it’s unlikely to arise,

Won't he pay handsomely above 25%

<Edit. Maybe not.... Small pots rule>

poops - legally, it doesn't matter what you want to do as any IFA or financial planner will only operate within the law and if they believe it's in your best financial interests.
An example...I had two final salary schemes but my marital status (divorced) and my children being long past 'dependant' on me meant that if I started drawing the pensions they would die with me - unless I remarried and/or acquired dependant children; not good from inheritance perspective.
So I wanted to get transfer values and then move both into a SIPP.
Talked with 5 IFAs, met 3 and shortlisted 2; my preferred one said...yes, this is doable - until they saw the pension payment projections when they said...we cannot recommend tansferring out as, in our opinion, it's not in your best financial interests.
Went to second on list who was much more accommodating but still asked pointed/challenging questions which forced me to justify my wishes - to their satisfaction.

My understanding - it's even more difficult now than it was then.

Yes, it's your money but the state is intent on ensuring - from it's perspective - that possibly reckless/imprudent financial decisions regarding pensions don't lead to an increase in the welfare budget.

Since you are over 55, you may be able to draw down 25% of your pension fund tax free and become a pensioner. This has implications for amount you can save in the future tax free (10k/yr).

Not quite correct. Taking the tax free part has no implications and neither does a small amount (£10K) but if taking more than £10k of taxable from pension then you hit the max £10K a year you can put into your pension before being taxed on it. I know this because I foolishly did it...

Thanks all!

@frankconway
Thank for the info, I've just asked you a quick question via a PM.

Another thought, if he's a copper has he thought of getting a transfer to somewhere cheaper to buy?

^^ Yep, the Police Federation might offer IFA, my lads going to check. 👍

Had an hour long call with Macmillan, not called them before, they were great with the financial info. Recommended if anyone ever needs them. Though I hope you don't.😄