With many of us having seen the problems the younger generations are having with their finances in general and getting on the housing ladder in particular, do you plan on giving them some financial support?
Leaving them something in our wills could make a huge difference, especially if that something is the home we will no longer be needing, or the profits from its sale.
But there is a problem with this. We may plan on enjoying that home for many more years. If our beneficiaries have to wait until we die, they may well be too old to make full use of our generosity.
The average age for receiving an inheritance is 47 according to a recent study, so at Continuum we believe in looking at pre-inheritance.
Inheritance and you
Inheritance is of course simply the transfer of property after a person passes away. How that property is transferred depends on your wishes and priorities as stated in your will. Failing to make a will means that you will have no say in who receives your worldly goods when you have no further use for them. They will be distributed according to the laws of intestacy.
But do you and your beneficiaries really need to wait until you die to pass on your wealth?
The answer is no – and it could even have some tax advantages which mean more of your money goes to your loved ones and less to the taxman.
Giving it away
Pre-inheritance is of course the practice of giving your loved ones the money they would get in your will while you are still very much alive.
The advantage to them is of course that they can have the cash they need when they need it, while you can have the pleasure of seeing them put it to good use.
But of course, you can’t simply sign your entire wealth over and have done with it, for two very good reasons. The first is that you will have your own future to think about. You may have more wealth than you know what to do with now, but the position might change if you became ill and needed round the clock care.
The other problem is the taxman.
He can’t stop you from giving money away, but he might try to tax your generosity after you have gone.
The inheritance tax problem
Inheritance tax (or IHT) is becoming an increasing burden. It is charged at 40% of everything in our estate above a £325,000 threshold, although there are some concessions relating to your family home.
It means a big bite is taken out of the wealth you leave your loved ones after your death.
Unfortunately, giving your wealth away while you are still alive does not avoid IHT. The taxman has taken pains to prevent ‘deathbed giving’ as a way to avoid IHT obligations.
You may be generous as you want to your loved ones when you are alive, but the taxman will take a cut of their wealth once you are gone.
You can still give some of your wealth away, but if your estate is worth more than £325,000 you will need to do it seven or more years before your death to avoid IHT.
If you die within that seven year period, there’s a sliding scale of liability. For example, your beneficiaries will pay 40% if you died within three years, and 24% if it was between four and five years.
Gifting them money now could leave them with big financial problems down the line.
Getting some expert help
But if properly arranged, pre-inheritance giving while you still have many more years to live could not only let you see your loved ones benefit from what you give, it could greatly reduce the chance that there will be any inheritance tax liability for them to pay on what is left.
As always, when tax is involved, getting expert help is going to be vital if you are to avoid the pitfalls.
Fortunately, getting that help is simply a matter of calling us at Continuum. We can help you look at your current financial situation, ensure that you have enough for you own needs and find efficient ways to make sure that is your loved one, rather than the taxman, who benefits from your generosity.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable inheritance tax strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
The Financial Conduct Authority does not regulate taxation and trust advice & will writing.
