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A common financial goal for many people is to use their wealth to support the next generation of their family.
While this is often achieved through leaving an inheritance, you have the option of gifting money during your lifetime, too.
Gifting money could benefit the younger members of your family who are struggling with the rising cost of living and wages that are not increasing with inflation. As a result, you may want to help support their regular income by providing financial support.
As with any financial decision, there are various advantages and drawbacks to consider before you choose to do this. So, read three excellent pros and three potential cons to consider when gifting money during your lifetime.
3 pros of gifting during your lifetime
1. You could reduce the size of your estate
Gifting during your lifetime can be a useful way to reduce the value of your estate so that it falls under Inheritance Tax (IHT) thresholds.
If the value of your estate (including all assets) exceeds £325,000, IHT may be due. There is an additional allowance of £175,000 if you leave your main home to your children or grandchildren too, taking your total tax-free threshold to £500,000.
You can also combine your thresholds with your spouse or civil partner, allowing you to pass on up to £1 million without incurring an IHT charge.
However, with rising house prices and surging inflation, your assets may reach the IHT threshold without you realising it. This might see your family charged a 40% IHT bill if they inherit money and assets above these thresholds.
Meanwhile, making gifts during your lifetime can reduce the size of your estate so it will remain under the IHT threshold.
There are various exemptions and allowances that mean you can give IHT-exempt gifts. This includes:
Annual exemption – gift up to £3,000 each tax year, and up to £6,000 as a couple, with the value being excluded from your estate. This can be given to one person or split between many.
Small gift allowance – you can give as many small gifts of up to £250 as you’d like. You must not have used another allowance with the same person when making small gifts.
Gifts for weddings or civil partnerships – you can give IHT-free amounts to loved ones who are getting married. This is up to £5,000 to your child, £2,500 to a grandchild or great-grandchild, or £1,000 to any other person.
It’s worth noting that your beneficiaries may still face an IHT bill, as gifts that exceed these exemptions may be considered part of your estate. These gifts may be included inside your estate for up to seven years. Find out more in the “cons” section later on.
2. You can mitigate IHT without giving a lump sum
You can also make gifts during your lifetime and mitigate IHT by doing so directly from your income.
This allows you to give excess income you don’t need to live your lifestyle, with this value falling outside the value of your estate.
If gifting using this method, you must ensure that the gift comes directly from your income and that you have enough left after the gift to maintain your usual standard of living.
Gifts from your income must also be regular, such as paying into your child’s savings account every month. Parents and grandparents may also use this to pay for school fees.
You should keep comprehensive records of any gifts given and when they were made to ensure that these remain exempt from IHT.
3. See the benefit of your gift during your lifetime
One of the biggest reasons people like to gift during their lifetime is to see the benefits their wealth brings to their loved ones.
Your gift can help loved ones overcome challenges they face now, such as helping them manage rising living costs or enabling them to get on the property ladder. Your gift may help them secure their own financial future or even help them achieve their life aspirations, perhaps by paying for their education.
Meanwhile, you’ll have the immense satisfaction of seeing this happen during your lifetime.
3 cons of gifting during your lifetime
1. You need to be sure you can afford it
The first point to note when gifting money or assets during your lifetime is that you must be sure you can afford it both now and in the future.
Take time to assess the impact of gifting both large and small sums of your wealth and the effect it could have on you. Will your pension still provide you with the lifestyle you want if you make gifts? Or would you be able to afford later-life care if you needed it?
Ensure that you consider the effect gifting may have on you, so you can be confident you have enough to continue living your desired lifestyle while still supporting your loved ones.
2. It will reduce the inheritance you leave behind
While reducing the size of your estate may mitigate a potential IHT liability, it will also mean that there will be less wealth for your family to inherit on your death.
This doesn’t ultimately matter, as your family members will still receive money from you in the form of the gifts you provide in your lifetime. Even so, you need to make your family members aware that they’ll likely receive less inheritance when you pass away if they receive gifts now.
3. You may still pay IHT anyway
An important drawback to keep in mind when gifting is that your beneficiaries may still have to pay IHT on the value.
You must outlive any gifts that exceed your gifting exemptions by at least seven years for them to fall outside the value of your estate.
If you die before this seven-year period ends, the gift may be subject to IHT on a sliding scale, known as “taper relief”. This sees the rate of IHT become lower the closer the gift is to the seven-year mark.
You should also be aware that gifts receiving taper relief will be the first part of your estate calculated in your tax-free thresholds. This may mean you also don’t benefit from a lower rate of IHT.
Speak to us to find out more about how taper relief works if you’re unsure.
Plan ahead to gift during your lifetime
Gifting can give you the tremendous pleasure of seeing the positive effects your gift has had on your loved ones. It can also help to reduce IHT if thought through carefully.
However, you must take care to be sure that you don’t gift more than you can afford, or that your gifting is actually reducing your IHT liability.
Financial planning will give you the confidence to provide support to your loved ones while knowing you can still live the life you want now and in the future.
Speak to us
For advice on Inheritance Tax and gifting money, please do get in touch with us at Atherton York. Email us at info@athertonyork.co.uk or call us on 0208 882 2979.
Please note
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
For taper relief/PETs
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
This article does not constitute financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.