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Written by: Svenja Keller
19/06/2020
The lockdown period has forced us to retreat indoors and take a breather from our fast-paced lives, and many have chosen this opportunity to take stock of their financial situation and plan their next steps.

The fact that there’s been an increase in enquiries about wills over the course of the pandemic also shows that we’ve been forced to consider our own mortality, leading a lot of people to question ways in which to pass down wealth to loved ones.

One option many will consider is making outright financial gifts. Millions do it each year in different forms, and it can cover anything from small sums like weekly pocket money, to offering to pay the deposit for a house. However, there are a number of things to consider before making this decision to pass down wealth.

Balance your needs with the needs of beneficiaries

The best place to start is to ask yourself whether you are balancing your own requirements with those of your beneficiaries. You need to make sure you have enough money for your own lifestyle as well as helping out those you love. You’ve worked hard for the money, so you also need to enjoy it! With this in mind, cash flow planning is a helpful tool.

It can often be the case that you don’t want to have to think about your needs in later life, but when considering gifting you need to look at future expenditure. This could, for example, include long-term care costs.

You would need to take these costs into account alongside leaving a buffer of money, should you have any additional unforeseen costs in the future and to allow for cash flow modelling being based on assumptions which are subject to change.

When cash flow planning, an adviser can model the amount you could afford to gift based on a range of different circumstances. This allows you to make informed decisions, with your adviser, on what you feel is a comfortable amount to gift (now, over time, or in the future).

Timing your gifts

Once you have decided on the amount, the next step would be to think about the timing of your gift(s). There is no real blanket answer for this, it really depends on your family.

You need to think about when you feel comfortable parting with your funds and how the timing fits into your own financial plan. It can sometimes be easier for all parties if the gifts are tied into events, or points in time when the funds are needed. This could, for example, be a wedding, to pay for school fees or the deposit to a house.

The gift doesn’t necessarily have to happen at this point but will give the beneficiary a clear objective to work towards.

Tax implications of financial gifts

The amount and timing of gifts are also influenced by the tax implications. An outright gift is classed as a potentially exempt transfer (PET) for UK Inheritance Tax (IHT) purposes. IHT will only apply if the donor dies within seven years of making the gift (and if the gift exceeds the threshold called the Nil Rate Band). From that perspective, people should consider not leaving it too late to gift.

However, there is a trade-off here: gifting too early could impact your own lifestyle in the future and it is more difficult to predict how much you should hold back for your own requirements. Regular gifts may be an option and careful planning using cash flow modelling tools is certainly recommended.

Communication between family is key to manage expectations

It seems obvious that you would also have to decide on who to make the gift(s) to, but this is again an important point to think about. If you gift to children, do they all receive money at the same time or when they reach a certain age?

Would you gift the same amount or different amounts based on needs and taking into account inflation? Some people gift to their children when they are older and well established themselves.

Whilst the children are likely to still welcome the gift, it might have had more impact for them if they had received it earlier in life. Equally, increasing their own wealth at a later stage may cause them an additional Inheritance Tax issue. The latter could be mitigated by skipping a generation and gifting directly to grandchildren for example.

How would the children feel about this step? As so often, communication is key between family members. However, we regularly see that families find it a difficult subject to broach and there is often a mismatch of expectations between generations.

A survey Killik & Co. conducted last year was a stark reminder of beneficiaries relying on gifts for major life decisions. We found three-fifths (59%) of under-35s felt unable to buy their first home before receiving an inheritance, while almost a quarter (22%) said they were postponing starting a family.

Sometimes, people are afraid to gift large amounts as they feel this may take away the younger family members’ motivation to generate their own wealth, for example through a successful career.

This is a very valid concern. My view is that education can play a big role here. Speaking to your children early on and getting them used to the family money, dealing with it responsibly, investing it and understanding how money works, is a great place to start.

There is a lot to think about when making financial gifts, in particular as this is not the only option to pass wealth to the family – trusts or company structures may also be appropriate – or to mitigate IHT – various other options are available.

However, this should not put you off. The starting point is to speak to an adviser to understand your options and to decide how you can approach the subject with your family.

Svenja Keller is head of wealth planning at Killik & Co

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