Delayed inheritance affecting life milestones: Could gifting help?

Inheritance Tax

As life expectancy rises, young people are receiving inheritances later in life. This has led to some putting off major life decisions and milestones, as they struggle to secure the capital required. If you want to give children and grandchildren a helping hand now, could gifting a lump-sum offer a solution?

According to a survey, almost six in ten under 35s are relying on grandparents to get a foot on the property ladders. Almost a quarter are also delaying having children until they receive an inheritance. Worryingly, 73% of those expecting to receive an inheritance said it was essential for their financial security. With transfers of wealth typically happening later in life, it could mean decades of financial uncertainty for younger generations.

Only 7.6% of over 65s plan to pass on the majority of their estate during their lifetime, indicating that gifting hasn’t been a consideration for many. But it is a step that could provide loved ones with the capital needed to tick off milestones and improve their long-term financial situation.

Passing on a portion of your wealth now can have numerous benefits. Not only will loved ones benefit but you have an opportunity to see the joy and financial security your generosity has brought. For some people, it can also be efficient for tax purposes.

If you think gifting could be right for you and your family, there are two key areas to consider first: Inheritance Tax and the long-term financial impact on your lifestyle.

Inheritance Tax and gifting

If your estate may be liable for Inheritance Tax (IHT) when you pass away, it’s important to consider liability when giving gifts to loved ones.

If your entire estate, including property, savings, investments and physical assets, is valued at more than £325,000, you will exceed the Nil-Rate Band and IHT may be due. You may also be able to take advantage of the Residence Nil-Rate Band if you’re leaving your main home to children or grandchildren. This can add £150,000 (rising to £175,000 in 2020/21) to the amount that can be passed on to loved ones without IHT being due.

Why does this matter when you want to gift?

Some gifts may be considered part of your estate for IHT for up to seven years after they are given. As a result, gifting can change your IHT position.

There are some gifts that are considered immediately outside of your estate for IHT purposes:

  • Up to £3,000 annually, unused gifting allowance can roll over to the next tax year, however, if it’s not used in the following year you will lose it
  • Gifts that are worth less than £250 can be given to as many individuals as you like
  • Gifts that are given from your surplus income. You must have enough income to maintain your usual standard of living to use this exemption
  • Wedding gifts up to the value of £1,000, rising to £2,500 for grandchildren and £5,000 for children
  • Gifts that help with living costs may also be exempt. This may include you providing gifts to vulnerable adults or children to cover living expenses

When given, gifts not on the list are considered potentially exempt from IHT. Should you live for a further seven years after the gift is given, it will not be included in your estate when calculating IHT. If you die within seven years of giving a gift, IHT is applied through taper relief.

Years between gift and death Tax paid
Less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%

Keeping IHT in mind when gifting may help you reduce the amount paid on your estate overall and reduce the likelihood of loved ones being left with an unexpected tax bill.

If you’re unsure how Inheritance Tax could affect your estate and gifting plans, please contact us.

The financial impact of gifting on your financial stability

Considering IHT that may be due when you’re gone is important. But, ensuring that any gift doesn’t have a negative impact on your personal financial stability and goals is crucial too.

Younger generations are finding they’re inheriting at a later stage in life as life expectancy is on the rise. It’s an issue that will affect those leaving an inheritance behind too. In the past, you may have financially prepared for a retirement that lasts 20 years. Today, retirees need to consider how they’d cope financially if they lived to be 100. For many, this means a retirement that spans between 30 and 40 years.

If you gave grandchildren a lump sum to act as a house deposit now, would it affect your financial security in the short, medium or long term? This is where financial planning and cashflow modelling can give you peace of mind. Knowing that you’re in a position to hand over financial gifts and still reach your own aspirations allows you to do so with confidence.

If you’d like to offer loved ones a gift as they strive towards life milestones but aren’t sure what impact it’d have on your situation, please contact us. Our goal is to give clients the financial confidence they need to make decisions that are right for them and those they care about.

Please note: The Financial Conduct Authority does not regulate estate and tax planning.