Why are more people giving away their assets in their lifetime?
Inheritance tax-free thresholds being frozen over a long period mean more of us face inheritance tax bills, particularly as house prices are high and the value of our homes plus our other assets means we may be surpassing the tax-free IHT threshold. Coupled with the financial challenges faced by younger generations, more families are considering gifting their inheritance in their lifetime rather than waiting till they die.
And this is fast becoming a trend. Data obtained from HMRC shows over the last decade a substantial 48% increase in families choosing to distribute their wealth before they die. Furthermore, research conducted by Barclays indicates that more than three-quarters of 40-year-olds have already received some form of inheritance from their parents. These inheritances are often directed towards savings, investments, starting a business, or purchasing a first property. The data from the Institute for Fiscal Studies (IFS) highlights that individuals aged 25 to 34 are the most likely recipients of such transfers, with approximately 1 in 10 receiving a gift and 1 in 25 receiving a loan over a two-year period. The majority of these gifts come from parents, while around 9% are received from grandparents or great-grandparents.
This early financial assistance is proving instrumental in helping people navigate significant life events, including home ownership and managing their increasing day-to-day expenses.
While many inheritance gifts are directed toward major life events, such as buying your first home or getting married, there's also a notable trend of using gifts for immediate, tangible needs. These include savings or investments (15%), non-cash gifts (15%), covering general living expenses (6%), debt repayment (5%), addressing significant family expenses (5%), purchasing vehicles or funding driving lessons (4%), enjoying holidays (2%), and covering educational expenses (2%).
Pro and Cons of gifting in your lifetime
In the UK, the inheritance tax threshold stands at £325,000. Gifting assets early can reduce the value of an estate, potentially keeping it below this threshold. Moreover, gifts made more than seven years before a person's death are typically exempt from inheritance tax, offering a significant tax advantage.
Given the challenges posed by the escalating costs of living and housing, younger generations can benefit immensely from early financial assistance. This support can help them enter the property market, pursue higher education, or even embark on entrepreneurial ventures.
However, as the gifter, the rising costs of care in the UK mean that individuals making a gift need to ensure they retain enough assets to cover potential future expenses, especially in their later years.
While there are advantages regarding inheritance tax, other tax implications may arise. For example, gifting a property that isn't the primary residence could incur Capital Gains Tax on any increase in its value.
Once assets are transferred, reclaiming them is legally complex and can be emotionally challenging. If a beneficiary faces legal, marital, or financial issues, these assets may be at risk.
Is gifting right for me?
As the baby boomer generation is approaching retirement age with property ownership and comfortable retirement income, they recognise that their children and grandchildren may struggle to achieve the same level of financial security and may be eager to provide support.
If you are contemplating early inheritance gifting while you're still alive, it's crucial to carefully consider how and why you're gifting this inheritance.
If your motive is tax-related, assess whether the gifts will bring your estate value below the UK's £325,000 IHT threshold.
Keep in mind that gifts should be final, as reversing them is legally complex and emotionally challenging. If a beneficiary encounters legal, marital, or financial issues, those gifted assets may be at risk.
Therefore, seeking professional advice on early inheritance gifting is essential to ensure the safety and security of your finances
