The pros and cons of giving a “living inheritance” to your loved ones

Thinking about what you want to leave behind for your loved ones may be an important part of your financial plan. After all, it’s likely you want to make sure that they’re looked after and supported financially when you’re gone.

Although it often comes at a difficult moment in life, an inheritance can be a useful windfall that helps your loved ones achieve certain goals they might otherwise find hard to reach.

The latest figures from the Office for National Statistics (ONS) show that the median average inheritance between July 2014 and June 2016 was £11,000. This is a significant sum and the ONS survey found that 49% of people saved or invested their inheritance, suggesting they may be using the wealth to support their long-term goals.

In the past, people typically left most of their estate to loved ones in their will. However, IFA Magazine reports that, over the last decade, there has been a 48% increase in families gifting their inheritance while they’re still alive.

There are potential benefits to giving a “living inheritance” in this way, but also some downsides you might need to consider.

Read on to learn more about the pros and cons of giving a living inheritance.

A lifetime gift could help your children reach milestones such as home ownership or marriage

As the cost of living rises, your adult children might find it difficult to reach certain milestones such as purchasing their first home. Indeed, Uswitch reports that 9% of all first-time buyers in 2023/24 relied on an inheritance for their deposit.

Also, according to Hitched, the average cost of a wedding in 2023 was £20,700 – an increase of £2,300 on the previous year.

As these costs rise, gifting an inheritance now instead of leaving it to children or grandchildren in your will could help them afford to buy a home or get married.

More importantly, if you pass wealth on while you’re still alive, your loved ones can achieve these goals sooner. And, giving while living also means you can share the experience with them, benefiting from seeing the positive impact your support provides.

Gifting could help you reduce the Inheritance Tax that your family pays

Inheritance Tax (IHT) has been a constant concern for many people in the past few years as the number of families paying the levy increases. According to the Actuarial Post, the government raised £7.5 billion from IHT in 2023/24, making it the third record-breaking year for IHT receipts in a row.

As such, you might want to find ways to mitigate IHT and gifting an inheritance while alive may help.

In the 2024/25 tax year, your “nil-rate band” – the amount you can pass on without triggering a tax charge – is £325,000. You may also benefit from a “residence nil-rate band” of £175,000 when passing on your main home to a direct descendant such as a child or grandchild.

You can also pass your full estate to your spouse without IHT and they inherit your unused nil-rate bands. This means you may be able to pass on up to £1 million between you. However, any wealth that exceeds your nil-rate bands may trigger an IHT charge.

Lifetime gifting could allow you to reduce the size of your estate so that less of your wealth exceeds the nil-rate bands.

In 2024/25, the first £3,000 you gift automatically falls outside of your estate for IHT purposes and won’t trigger a tax charge. You can also give up to £5,000 to a child or £2,500 to a grandchild or great-grandchild for a wedding without triggering a tax charge.

Further to this, you can make small gifts of up to £250 to as many people as you like, provided you haven’t used any of your other gifting allowances on them. You may also be able to use the “gifts from income” rule to give unlimited gifts provided they:

  • Are regular
  • Are paid from your income rather than other sources such as savings
  • Don’t affect your lifestyle.

Any further gifts may also fall outside of your estate if you survive for seven years after passing on the wealth.

Consequently, you might be able to reduce the IHT that your family pays if you gift an inheritance to your beneficiaries while you’re alive. The younger you are when you make a gift, the more likely you are to survive for seven years after making it and, consequently, it falling outside your estate.

That said, IHT rules can be complicated so you may want to seek professional guidance and ensure you’re being as tax-efficient as possible.

You could risk financial difficulty if you gift more than you can afford

As a parent, it’s natural that you want to look after your children or grandchildren, but it’s important that you consider your own financial security too.

If you give away too much of your wealth now, you may have difficulty managing certain expenses when you’re older. Later-life care is a good example of this as reports that the average cost of a nursing home in the UK is £1,410 a week.

Passing on too much wealth now could mean that you’re unable to meet this cost if you require care. Giving more than you can afford might also mean that your savings run out faster than expected and you can’t fund your desired lifestyle in retirement.

Unfortunately, once you pass wealth to your loved ones, it could be difficult to ask for it back, especially if they’ve spent or invested it. That’s why it’s crucial to consider what you can afford to give as an inheritance. However, this can be challenging as you don’t know what the future holds.

Working with a financial planner could be beneficial here as we can use cashflow planning to help you determine what you can afford to give. We can also factor in expenses such as care costs, to ensure you can still afford to fund your lifestyle after giving a living inheritance.

Get in touch

If you want to explore ways to pass wealth to your loved ones, we can help.

Please give us a call on 01276 855717 or email today.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.

The Financial Conduct Authority does not regulate cashflow planning.

Approved by the Openwork Partnership on 29/05/2024