The Times recently reported that older generations will pass on nearly £1 trillion at death in the next decade. On the face of it, this seems like a useful redistribution of wealth, particularly in a world where younger people are struggling to own a home and meet the costs of education.
However, there is a problem in that the average age people inherit money is rising. According to the Institute for Fiscal Studies, those born in the 1960s will be an average of 58 when their last surviving parent dies. Those born in the 1970s will be 62 and those born in the 1980s will be 64.
Inheriting your parents’ money at age 64 – when you may be on the cusp of retiring yourself – may not be hugely beneficial. However, imagine what you could have done if you’d inherited that money at age 30?
Distributing wealth when it can make more of a difference to your loved ones is an idea that is gaining traction. The idea of ‘giving while living’ has already been adopted by the likes of Warren Buffett and Bill and Melinda Gates; individuals who have donated huge sums from their personal wealth rather than leave it in the form of bequests.
Read on to find out how you might get more joy from ‘giving while living.’
A quick recap of the gifting rules
In reality, there are no restrictions on the gifts you can make to others while you are alive. You can typically give away anything without any Inheritance Tax (IHT) repercussions if you live for seven years after making the gift. There may only be IHT implications if you die within seven years of the gift.
You also have an annual exemption of £3,000, which means you can gift up to this amount in the 2020/21 tax year and not pay any IHT on this gift. You can carry this exemption forward for one year if you don’t use it. Remember that it’s an individual exemption, so a couple can gift up to £6,000 in the 2020/21 tax year, and £12,000 if you carry forward the previous year’s unused exemption.
You can also make as many gifts of up to £250 as you like, as long as they are not to someone you have used other allowances on. There are also exemptions for gifts on the event of a marriage, regular gifts you make from income, and gifts to charity. Download our free Inheritance Tax gifting guide for more information.
So, why should you give while you are still alive?
Get the pleasure of seeing what your money can do
It’s all very well leaving a legacy to your loved ones when you die, but you don’t get to see the benefit of your gift.
The most positive reason for ‘giving while living’ is that you will get the pleasure of seeing your loved ones benefiting from your wealth at a time that delivers maximum help to them.
A well-timed gift could fund the deposit on a first home, could help to pay for a wedding, or be the deciding factor in whether a child or grandchild can make further study an option. In more practical terms, it could also help a young person to weather the current economic climate in which job opportunities are limited.
What could be more rewarding than knowing that wealth which you are not relying on can be used by your children or grandchildren at a crucial time in their life?
If you live to 90 and only pass on your wealth when you die, the chances are that your children will be aged around 60 and perhaps contemplating retirement themselves. While inherited wealth is always welcome, it could have done more for the recipient while they were developing a career, buying a home, or paying for education.
You can shape how the money is used
When you pass on a cash sum on death, it’s hard to specify exactly how the money should be used. Giving while living provides you with the opportunity to shape how your beneficiaries spend the money.
For example, you could help a child or grandchild with their property search, or to plan their wedding. You could also work together with a financial planner to ensure that the money is working as hard as possible for both generations.
And, if you don’t have direct descendants, you could use your surplus wealth to fund a favoured good cause and influence how the gift is used.
Benefit from tax advantages
There are also some tax advantages of passing on wealth at a time of your choosing. As we mentioned above, wealth passed on at least seven years before your death will typically no longer form part of your estate for Inheritance Tax purposes.
Rather than waiting to pass on a legacy when you die – which may attract IHT at a rate of 40% if you exceed the various exemptions – giving while living could mean you pay no IHT at all. And, of course, the earlier you give, the more likely you are to survive for the next seven years so the gift doesn’t form part of your estate.
And, as we mentioned above, there are also annual allowances for lifetime gifts and other exemptions, which mean that gifting while you are alive can make sense from a tax planning point of view.
Get in touch
Of course, there are clearly barriers to giving while living. For example, a major source of wealth may well be the home you live in, and financial products that allow you to access this wealth in a cost- effective way may still be tricky to find.
In addition, you don’t know what the future holds. Gifting the majority of your wealth could leave you short of money in later life – especially if you live to a grand old age – and so it may make sense for you to retain some financial reserves for unexpected eventualities.
We can help you to make the right choices about how you can make sure your wealth not only generates security for you in retirement, but also enables you to ensure your children and grandchildren get off to a great start in life.
Please email firstname.lastname@example.org or call 01454 416 653 to find out more.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.