From IHT to money gifts, how to pass down wealth effectively

The coronavirus pandemic has had an enormous impact on many aspects of our lives. 

The restrictions that were in place prevented many of us from seeing family outside our immediate household, putting a hold on hugs from grandparents and curbing our natural inclination to gather and to be together.

This has underlined how precious those ties are; how important it is to make the most of life and to look after those closest to us.

Our advisers are seeing more customers think about the best way to pass down wealth to loved ones, a topic that is often tip-toed around. 

As a nation, we’ve never been very good at talking about money, but with many of us now reviewing our finances, this is an opportune time to sit down and have an honest discussion, whether that’s in person or over Zoom.

But it’s not just a case of thinking about any inheritance you may leave behind. It’s worth exploring what you can gift while still alive. This can ensure your children have financial support when they need it most and, as a parent, you are still around to watch them enjoy it.

For those who have built up enough of a retirement savings pot, this can be done using existing funds. If you’re a homeowner, you might also consider unlocking cash from the value of your home, whether that’s by downsizing or using some form of equity release.

Frequently it is the big life events that prompt people to start thinking about giving a ‘living inheritance’, as gifting money is often referred to. It could be paying for a grandchild’s wedding, contributing towards university fees or providing money to kick-start a new business. The most common reason, however, is to help children on to the housing ladder.

The recent cut to stamp duty will create, in the short-term, more opportunities for first-time buyers. But with house prices holding steady, parents and grandparents, in many cases, may still be relied upon by family members who want to take advantage of the cuts.

Bank of Mum and Dad: The recent cut to stamp duty will create, in the short-term, more opportunities for first-time buyers but parents may still be relied upon for help

If parents are considering helping children financially, the reduction in stamp duty does offer more flexibility, making downsizing more cost-effective, with equity release an option for those who wish to remain in their home.

With the economic environment looking increasingly challenging, we may also start to see increasing demands on the ‘Bank of Mum and Dad’, borne out of necessity, rather than desire. Many young adults have been disproportionately affected by the crisis, with one-third of 18-24-year-olds having lost their jobs or been furloughed.

There are, of course, tax implications to consider when gifting money to family members, which may impact both the timing and amount of money given. 

A key benefit of passing money on while still alive is that an outright gift is classed as a potentially exempt transfer (PET) for Inheritance Tax (IHT) purposes, which means that IHT will only apply if the donor dies within seven years of making the gift. 

This is an important rule to bear in mind, and the added tax benefits of an early gift could be seen as an incentive to start making plans before it’s too late.

Cash gifts: IHT will only apply if the donor dies within seven years of making the gift

Another essential thing to consider before gifting money is how long you are likely to live and how much you are going to need to spend in your retirement. 

I recently took part in one of our Rewirement podcasts, hosted by Shirley Ballas, where another guest, Jasmine Birtles, made an interesting point around our tendency to underestimate our own spending habits. 

As a tip for anyone looking to pass money on, she suggested looking at your bank statements for the last year, to get an idea of how much you need to finance your desired lifestyle, and to make sure you gift sensibly and aren’t compromising your own standard of living.

These decisions obviously aren’t easy and gifting money can be complicated, so I would always recommend speaking to a financial adviser, to get expert advice based on your specific circumstances, as everyone’s situation is unique.

Many people I know have held long-standing relationships with their adviser. I was reminded of this again recently, when podcast host Shirley Ballas explained how she had known hers for over 40 years, so finding someone you trust can be highly beneficial.

As well as the tax implications, gifting money to family can be a sensitive topic. An adviser can bring some much-needed objectivity, to make sure you fully consider your own requirements in retirement before making any big decisions.

Sara McLeish is the chief executive of Legal & General Financial Advice.