Should you give your children their inheritance early? The sums say yes

Senior mother smiling and drinking coffee with her adult daughter

There’s a lot to think about when planning how to pass your wealth to future generations. You may be wondering who’d be best to receive your most prized possessions, or how to split your assets fairly between grandchildren.

But what you may not have thought about is giving out some of your wealth before you pass away.

Experts believe that gifting to your children and grandchildren while you’re alive could benefit you and your family both financially and emotionally. But why is this the case, and what are some of the risks involved? Read on to find out more.

“Giving while living” can help to save money

Traditionally, the concept of leaving an inheritance is to give a gift to your loved ones after you die. However, nothing is stopping you from transferring your wealth before you pass on yourself.

“Giving while living” or “giving with a warm hand” does exactly that and doing so could save your family thousands of pounds.

If you were to leave behind your entire estate upon death, then your beneficiaries may be subject to Inheritance Tax (IHT), commonly known as Britain’s most hated tax, which stands at 40%.

IHT is charged on any of your estate over the value of £325,000; this is known as the “nil-rate band”. If you leave your home to a direct descendent, a child or grandchild, then you can benefit from the “residence nil-rate band”. This brings the point at which IHT is charged to £500,000 in the 2021/22 tax year.

Giving while living can help to mitigate the tax charge. Rather than passing money on death, the “seven-year rule” lets you gift however much you like provided you survive for seven years after making the gift. The earlier you start to pass on wealth, the more likely you are to survive for seven years, and the less IHT your family are likely to pay.

Note that if you pass away less than seven years after giving a gift, and the value of your estate is over the nil-rate band, your beneficiaries may receive a tax bill. The amount of tax payable depends on how long you live after making the gift.

Your loved ones could save thousands depending on the circumstances

As well as reducing a potential IHT bill, gifting while living could also help your family save thousands of pounds at crucial life moments.

For example, according to a study reported by inews, an early inheritance gift of £40,000 from 75-year-old grandparents to their 25-year-old grandchild could save the grandchild more than £75,000 in rent alone.

The study is based on national averages, assuming that the grandchild is renting a two-bed property at £700 a month, and that they are on track to be a first-time buyer at the age of 34.

This could help your grandchild get onto the property ladder roughly nine years earlier than average and help them to secure a better mortgage rate thanks to a larger deposit.

You can watch your gifts be put to good use

Situations like this aren’t necessarily the only reasons to give while you’re alive.

Firstly, you get to experience the benefits of your gift first-hand and see the impact your gifts have on your loved ones.

Whether using the money to move home, develop their existing property, or achieve other goals, your family will be able to show you the material results of your generosity.

Another key reason is that, with life expectancies increasing, your children may be approaching retirement age themselves by the time you pass away. If you wait until your death to gift them their inheritance, they may not have as much need for it.

As such, passing on your wealth when you are still alive helps you to gift money when it is truly needed. Perhaps your grandchild needs help making ends meet while studying at university, or your child is looking to renovate their kitchen or add an extension to their home?

Any gifts you make must be managed carefully to avoid financial trouble

As mentioned, gifts made up to seven years before you pass may be subject to IHT, so it’s usually best to start gifting as early as you can.

In addition to the “seven-year rule”, there is an annual IHT exemption for gifting of up to £3,000. This means that you can gift up to £3,000 each year without it counting toward your estate, so it will be exempt from IHT charges. Smaller gifts of up to £250 can be given as often as you like.

When gifting, you always need to ensure that you don’t leave yourself in a difficult financial position. Many parents are so keen to help their children out that they don’t consider the implications of making a gift, and whether they can truly afford it.

Indeed, research done by Just Group found that 70% of parents ignore any future care costs when gifting lump sums to their children. If you don’t factor in these costs, you could be left seriously short of funds later in life should you require full-time care or move into a care home.

A financial planner can help you remain confident in your decisions

If you’re unsure whether you can afford the gifts you wish to give, or whether early gifting is a feasible option at all, talk things through with a financial planner. We can help ensure that you and your family benefit as much as possible from your wealth.

We can help analyse your personal circumstances and organise a sensible, measured discussion of what you can do with your available resources. To find out more about how a financial planner could help you, email enquiries@bowmorefp.com or call us on 01275 462 469.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Bowmore Financial Planning Ltd is not regulated to provide tax advice

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.