When is the best time to pass on wealth?

Traditionally, people wait until their death to pass on wealth to children and grandchildren. But there are several reasons why gifting assets during your lifetime could be worth considering.

While the approach that’s right for you will depend on your individual circumstances, making lifetime gifts could not only prove tax efficient, but also make a bigger difference to your family’s financial wellbeing.

Here, we look at what to consider when deciding when to pass on wealth to your loved ones.

What’s your estate’s IHT liability?

Leaving assets to children and grandchildren via a will is very common, but it can be one of the least tax-efficient ways to pass on wealth. When you die, your estate will be valued for inheritance tax (IHT) purposes.

For a single person, assuming no gifts above annual allowances in the past seven years and full inheritance tax allowance is available, the estate will be assessed for IHT upon death. Any proportion exceeding £325,000 (the IHT nil-rate band) will be taxed at 40%.

On a sizeable estate, IHT of 40% could translate into a significant sum of money. Despite this, RBC Brewin Dolphin’s research  of 7,000 people – 2,000 of whom were over 55 years old with children, and 5,000 of whom were under 55 with living parents – found that almost a third of parents with £1m+ in savings and investments said they expect to pass on money when they die.

If you give your main residence (or the sale proceeds of it) directly to your children or grandchildren (direct descendants) when you die, you might qualify for the additional residence nil-rate band. This allowance is currently up to £175,000 per person and dependent upon the property value. It is also gradually reduced if your estate exceeds £2m.

Overall, an individual could potentially pass on a maximum of £500,000 before IHT kicks in. It’s possible to transfer any unused element of your IHT allowances to your living spouse when you die, which effectively doubles the limit to a maximum of £1m.

Could lifetime gifts be more beneficial?

Another way of passing on wealth is to gift money while you’re still alive. As well as being tax efficient, passing on wealth through lifetime gifts could be more beneficial for your children and/or grandchildren.

Rising life expectancy means that those who receive an inheritance via a will could be well into their 60s, by which point they may not need as much financial support. For a young adult, however, a financial gift could make a huge difference – perhaps enabling them to graduate from university debt-free or put down a deposit on their first home.

Our survey found that among respondents aged 18 to 24, nearly two-fifths wanted financial help from their parents ‘now’ – far higher than those in older age groups.

Having an open conversation with your family about their needs and expectations could be a good place to start.

Are you making the most of gifting allowances?

Another benefit of giving away money during your lifetime is that it reduces the size of your estate, which in turn can help to reduce your estate’s IHT liability.

There are a range of allowances that can enable you to gift money tax efficiently. These allowances aren’t straightforward, so it’s important to speak to a wealth manager before getting started. Gifting allowances include:

• Gifts of up to £3,000 each tax year – this is known as your ‘annual exemption’
• Gifts for weddings or civil partnerships – each tax year you can give up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to any other person
• Gifts from regular income
• Small gifts of up to £250 per person per tax year (so long as you haven’t used up another allowance on the same person)

Larger gifts are  ‘potentially exempt transfers’  and you need to live for at least seven years after making the gift for it to be tax free. It’s important to keep a record of any potentially exempt transfers you make, which a wealth manager can help you with.

How much can you afford to give away?

Before you give money away, it’s important to understand how this could affect your own future finances. If you give more than you can afford, you might have to make cutbacks later on or, worse, run out of money. A wealth manager can use cashflow modelling to illustrate the impact that lifetime gifts would have on your long-term savings, so that you can make a more fully informed decision.

Next steps

Knowing when and how to pass on wealth isn’t always easy, and that’s where getting some financial and/or tax advice comes in. By taking the time to understand your needs and wishes, a wealth manager can help you manage your estate’s IHT liability and build an estate plan that works for you and your family.

This article was originally published on RBC Brewin Dolphin .

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