7 things to understand before giving money to family

Why giving money away requires careful planning

Giving money to your family during your lifetime can be enormously rewarding. Done as part of a carefully considered financial plan, it may also help reduce the inheritance tax bill your loved ones face in the future.

Inheritance tax is currently charged at 40% on the value of an estate above the available allowances, so planning ahead can make a significant difference to how much of your wealth ultimately passes to the people you care about.

But giving money away isn’t simply a case of handing over as much as possible, as quickly as possible.

Many outright gifts can fall outside your estate for inheritance tax purposes if you survive for seven years after making them. However, the rules are complex, exemptions may apply and the tax treatment can depend on the type and timing of the gift.

At Continuum, we believe there are seven important things to understand before you start giving your wealth away.

1. Understand what’s in your estate

The foundation of good estate planning is understanding what you actually have.

Your estate can include your home and other properties, savings, investments and, following forthcoming changes to inheritance tax rules, potentially pensions too. Against this, you may have allowances available, including the £325,000 Nil-Rate Band (NRB) and, where the qualifying conditions are met, the £175,000 Residence Nil-Rate Band (RNRB) when a main residence is passed to direct descendants. Debts may also reduce the value of your estate.

The sooner you understand the value of your estate and your potential inheritance tax position, the more options you may have to plan effectively.

2. Understand how much you need

It can be tempting to focus on how much you would like to give your children or grandchildren. But before making any significant gifts, you need to be confident that your own financial security won’t be affected.

Retirement cash-flow planning can be invaluable here. It allows you to map your expected income against your future spending and consider different scenarios.

Your expenditure may fall during some stages of retirement but increase again later in life, particularly if additional help or care is required. Inflation and unexpected costs also need to be considered.

Reducing a future tax bill is important, but not at the expense of your own financial security. Once you understand how much you are likely to need, you can make better-informed decisions about how much you can afford to give away.

3. Understand how much your loved ones need

How and when you pass on wealth can be just as important as how much you give.

Consider the different stages of life your children and grandchildren have reached and where your support could make the greatest difference.

Helping a grandchild with a first-home deposit, for example, could have a much greater impact today than leaving them the same amount many years from now.

Other family members may have different priorities.

Talking openly about these needs can help you use your wealth in a way that has a meaningful impact during your lifetime.

4. Understand the importance of acting early

None of us knows what is around the corner, and the seven-year rule means that starting your planning earlier could increase the chances of gifts falling outside your estate for inheritance tax purposes.

Acting sooner may also be beneficial when passing on assets that could increase in value. Depending on the circumstances, gifting an asset earlier may mean that subsequent growth takes place outside your estate.

However, different assets and different types of gifts can have their own tax consequences, which makes taking advice before acting particularly important.

5. Understand what a trust can do

Sometimes you may want to pass wealth to the next generation without handing over complete control immediately.

Trusts can help provide greater control over how and when assets are used for beneficiaries. This can be particularly valuable where beneficiaries are young, vulnerable or perhaps not yet ready to manage a substantial amount of money themselves.

Different types of trusts work in different ways and can have their own tax implications, so choosing the right approach requires careful consideration.

6. Understand what your loved ones think

Talking about money and inheritance isn’t always easy, but discussing your plans with your family can prevent misunderstandings and disputes later.

It can also help your beneficiaries plan their own finances. Knowing that support may be available for a house purchase, education or another major life event could influence the decisions they make today.

These conversations can also help ensure that your plans reflect what your family actually needs rather than what you assume they need.

7. Understand the value of advice

Inheritance tax and estate planning can be complicated, and decisions made today could have consequences many years into the future.

The aim shouldn’t simply be to give away as much as possible to reduce a future tax bill. It is about finding the right balance between maintaining your own financial security, helping the people you care about when it matters most and passing on your wealth as efficiently as possible.

That’s where good financial planning can make a real difference.

Planning your next steps

At Continuum, we can help you understand your current position, explore the options available and help build a long-term strategy for you and your family.

Talk to us today about how we can help you plan for the future and make more of the wealth you’ve worked hard to build.

This article is intended for general guidance only and is based on the opinion of Continuum it does not constitute financial advice. Individual circumstances vary, and you should consider seeking advice from a regulated financial adviser before making any decisions about your Inheritance tax planning

Levels and basis of reliefs from taxation are subject to change and their value depends upon your personal circumstances. We recommend seeking professional advice on personal taxation matters

The Financial Conduct Authority does not regulate taxation, cash-flow planning and trust advice or will writing.