By Paul Moody, financial planning consultant, Armstrong Watson LLP
The majority of working years are spent building up savings and pensions to enjoy in retirement, and for many people, their wish is to pass what is left to children and grandchildren.
Traditionally wealth is inherited by family members after a loved one has passed away, with the most effective method of doing so by having written a will where your wishes are conveyed.
Perhaps you have written your will, and done some planning to mitigate the inheritance tax your beneficiaries may pay on your death. But could the cost-of-living crisis now be encouraging you to think differently?
Financially supporting your adult children and grandchildren
With media speculation about those on reasonable incomes unable to afford to pay energy bills, and reports of inflation potentially exceeding 18 per cent, you may be considering that now could be the time to step in to help your offspring.
The good news Is, that giving your children or grandchildren money while you are alive could be the most tax-efficient way to be the Bank of Mum and Dad during the cost-of-living crisis and could mean that you help your children now when they need it most.
What are the benefits of gifting a living inheritance?
There are numerous benefits to giving assets away while living:
Making gifts while you are alive lowers the value of your estate for Inheritance Tax (IHT) purposes
IHT is payable at 40 per cent on any wealth above a certain threshold, known as the nil-rate band. This is currently frozen at £325,000. If you plan to pass on your home, you can make use of the residence nil-rate band, currently frozen at £175,000.
You can gift any amount you like during your lifetime
Your loved ones will only pay IHT on a gift if your estate becomes liable for it, and you die within seven years of making the gift. This is known as the seven-year rule.
If you die between three and seven years after making the gift, the rate payable will be based on a sliding scale known as taper relief.
Tax-free exemptions to some types of gifting
There are some HMRC exemptions to giving gifts that are tax-free regardless of how long you survive after gifting. These include the:
- Annual Exemption, which allows you to gift £3,000 a year tax-free, with the option to carry forward any unused amount for up to one year.
- Normal expenditure out of income exemption, which allows you to make regular gifts as long as they are made from income and don’t affect your standard of living.
Personal benefits to gifting now rather than after death
The main benefit to gifting a living inheritance is that you are still around to see the difference your money makes. You might also find that your children receive the money when they need it most.
Inheriting on death, by which time your children might be in their 50s or 60s, might help during their retirement, but more important milestones – such as buying a first home or starting a family – occur much earlier in life.
Inheritance tax planning is a complicated space, and with any financial and tax planning around this area it is advisable to seek advice as to what step(s) is/are most appropriate for you and your family.
At Armstrong Watson, our quest is to help our clients achieve prosperity, a secure future and peace of mind. We provide bespoke tax planning, financial planning and wealth management all under one roof. Please note, advice on IHT related matters could be provided by a mixture of both our financial planning and tax specialists.
- For more information, email Paul at paul.moody@armstrongwatson.co.uk
