When you retire, you probably already know who you want to leave your estate to down the line. Hopefully you’ve also made a will to ensure that your wishes are followed when you die.

So far so good and you’ve done more than most people. But that raises two questions you might not have thought of:

  1. Could your loved ones benefit from receiving some of their inheritance now, while you are still alive?
  2. How much of your estate will be eaten up in Inheritance Tax (IHT)?

The answer to these two questions might be the same thing:

‘Living inheritances’.

As the name suggest, a ‘living inheritance’ is a gift made while you are still alive. This helps loved ones now, when the money is needed, and allows you to see the benefit it brings. Additionally, it might help to reduce the tax paid when you die.

Making sensible decisions

Research from OneFamily, a mutual organisation based in Brighton, has found that one in ten grandparents have given their grandchildren a lump sum. The average gift was £15,000.

The research also found that grandparents were twice as likely to offer financial assistance to their grandchildren, than the children’s parents.

With the house price rises we have seen over the past few years and the rising burden of student debt, it’s no suprise that grandparents are keen to help their grandchildren. If you are considering making a ‘living inheritance’ it’s easy to let your heart rule your head. But it’s important that your decision doesn’t harm your own financial future.

Predicting the income you need in the future isn’t easy. It’s made even harder by relatively high inflation and the likelihood that you will have to contribute to the cost of any care you may need.

Before you make a gift, we recommend meeting with a Financial Planner who can use financial forecasting technology to help you to understand the effect of making a gift on your own personal finances. They will also recommend the most sensible source of capital; for example, taking it from pensions may trigger an immediate income tax bill and be inefficient from an IHT perspective.

By taking advice, you will be able to make sure your head and your heart are acting as one; allowing you to make an appropriate gift, secure in the knowledge it won’t affect your own financial security.

There’s another benefit too; making a gift now could reduce the tax paid when you die.

Reducing your Inheritance Tax bill

Giving money away, if you can afford to do so, is one of the simplest ways of reducing the IHT payable when you die.

For it to be effective though, it needs to be done correctly.

There are certain gifts you can make which immediately reduce the amount of tax potentially paid when you die. These are known as ‘Exempted’ gifts and include:

  1. The annual exemption; £3,000 to a single person, or split between multiple individuals. You can give away £3,000 a year without falling foul of tax laws. If you failed to use this in the previous tax-year, it can be carried forward, meaning you can give up to £6,000 in the current tax year and it be immediately outside of your estate
  2. Gifts in respect of a wedding; Up to £5,000 from a parent, £2,500 from a grandparent and £1,000 from anyone else
  3. Small gifts; of up to £250 per person, as many times as you like in a tax year, so long as they have not received any other gift
  4. Living costs; payments you make to help with another person’s living expenses
  5. Gifts to charities or political parties

Furthermore, regular gifts you make from your unused income are also immediately exempt, providing you can prove they won’t affect your own standard of living.

Larger gifts, over these amounts, are known as Potentially Exempt Transfers (PETs) and will slowly fall outside of your estate over a seven-year period. In other words, you need to live for seven years after making the gift for it to be fully exempt from IHT.

‘Living inheritances’ a win, win, win?

Providing you can afford to make it, a ‘living inheritance’ can indeed be an all-round winner:

  • Your loved ones get to benefit from the capital now, when they really need it
  • IHT is potentially reduced
  • You get to see the benefit of your generosity while you are still alive

The first step though is to understand whether you can afford to make the gift, that’s where we come in (we can also help with the IHT side too). If you would like to discuss this in more detail, call us on 0113 262 1242.