Some say it’s better to give your children a warm hand than a cold one. In other words, an early inheritance could be an excellent financial choice for the entire family. Gifting a portion of your wealth to your loved ones while you’re still around could give them a much-needed financial boost while saving you from the dreaded inheritance tax.
About a fifth of UK parents have already transferred their wealth to their loved ones (Rozi Jones, Financial Reporter, 8TH OCTOBER 2018). Another fifth of UK parents have not yet transferred their wealth but plan to do so before they pass away. This phenomenon isn’t just driven by UK taxes on inheritances and capital gains. According to a Merrill Lynch retirement study, nearly 60% of Americans aged over 50 said they wanted to leave their inheritance to their children as soon as possible (Family & Retirement: The Elephant in the Room, 2013). Those surveyed said they wanted to help their loved ones achieve their dreams rather than simply minimise taxes.
Expanding lifespans could be another reason for considering an early inheritance. According to the latest ONS figures, the average UK life expectancy is over 81 years. This means most people won’t receive their inheritance till their 50’s or 60’s. However, people in their 20’s and 30’s need the financial support most. They’re starting families, paying for their children’s education, and managing a mortgage at this age. A financial impetus might be far more effective during this period.
Any of these reasons could justify an early inheritance. However, parents need to consider three important factors before they decide to hand their wealth over - retirement income, gifting regulations, and wealth longevity.
In other words, parents need to make sure they don’t give too much away too soon. Not having enough of money to live on in your 80’s and 90’s is a dreadful outcome that can be easily avoided with better planning. Planning also goes a long way towards making gifts tax-efficient. According to the current tax rules, residual estates are taxed at 40% on anything inherited above £325,000, or £650,000 for couples in a formal relationship. However, if a large sum was gifted before death and the giver lives seven years or more, the sum is not counted as part of the estate and does not attract inheritance taxes.
These rules and regulations on early inheritances could get complicated depending on your marital status, age, financial circumstances and the structure of your financial assets. To find the best solution for your unique requirements, refer to the UK Gov Inheritance tax manual or consult a professional financial adviser.
Information is based on our current understanding of taxation legislation and regulations which is subject to change