As a financial planner, one of the most common questions I get asked relates to the issue of gifting assets to your children.
Often this is in respect of the wider issue of estate planning and the desire to mitigate your Inheritance Tax (IHT) liability by reducing the value of your estate, as making gifts is one of most common, and straightforward ways of doing this.
Sometimes, however, discussion will also move onto the advisability of actually making gifts to other family members, notwithstanding any tax advantages.
There is no correct answer to this question. As you will appreciate, each family’s circumstances are different, and it will often come down to you making a considered judgement call on this issue.
If you are facing this conundrum now, or feel you may in the future, you should find the following points useful.
You need to be comfortable that you can afford what you’re planning to gift
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.
So, if you’re minded gift assets now, it’s sensible to start with the proviso that you’ve paid off your mortgage and debts and are confident that you will enjoy a good income in retirement.
As a financial planner, I will often use cashflow modelling to help illustrate the effect that a substantial gift, either now or in the future, could have on your long-term wealth. This will then help you make a fully informed decision based on financial evidence rather than guesswork.
By gifting now, you can watch your children enjoy your gift
Leaving aside the tax implications, one of the biggest advantages of gifting now rather than simply leaving provision in your will is that you will get the vicarious pleasure of seeing your children (or even younger generations) enjoy, and benefit from, your gift.
Furthermore, you will also gain comfort from the knowledge that your gift can make a real difference to their life.
For example, you may be helping them enhance their career opportunities by benefiting from further education, or you may simply be freeing them from the stresses and worries of excessive debt.
Alternatively, your gift could help them get on the housing ladder. This could mean they are no longer a financial burden on you, or perhaps remove the need to make monthly rental payments with no financial return.
Having your gift earmarked in this way can be highly beneficial both to you and your recipient. You will know that your gift is being used constructively, rather than simply frittered away. At the same time, your child will be able to make a positive step forward on their life journey.
It’s perfectly understandable if you are reluctant to gift your assets
Having made the positive case for gifting assets to your children, it’s important to consider the other side of the argument.
It will be perfectly understandable if you are at all reticent about giving your child or children a substantial sum of money.
It’s right, as a parent, to want them to make their own way in the world, without having their route to success made easier by their parent’s wealth.
You may feel that by being overly supportive from a financial perspective could end up featherbedding your children. You may worry that they could become too dependent on you, leading them to turn to you every time they are faced with a challenge they don’t feel they can confront on their own.
There may also be an element of the fear of the unknown built into your reluctance. If you make a gift to a child who subsequently marries and then divorces, the value of your gift could be dissipated. Likewise, if your child subsequently becomes bankrupt.
In these circumstances, one common compromise position is to make a loan rather than a gift, so they will still benefit from your generosity, but you will have the peace of mind that the loan is being repaid and they are learning an important financial lesson.
Another alternative is to make the gift in trust. Not only does this have the benefit of the asset leaving your estate for IHT purposes, but it also means that you can provide legally binding instructions to your nominated trustee as to how the gifts in trust are to be managed.
Gifting assets can reduce your inheritance Tax liability
As well as considering the pros and cons of gifting assets to your children from a personal family perspective, it’s also important to bear in mind the potentially beneficial tax advantages of making gifts from the value of your wealth.
Gifting assets could help to reduce the overall value of your estate and, as a result, reduce the IHT liability on your death.
At a simple level, you can make statutory gifts each year to reduce the value of your estate. These include:
- Gifts of up to £3,000, known as your “annual exemption”
- Gifts for weddings or civil partnerships up to ÂŁ5,000 to each child
- Gifts from your regular income – as long as this doesn’t reduce your own standard of living.
Beyond that, in reality there is no limit on what you can gift. But you need to be aware that any other gifts will be deemed “potentially exempt transfers” (PETs). This means that you need to live for at least seven years after making the gift for it to be free from IHT.
It’s important to keep a record of any PETs you make and the date you made them.
Get in touch
If you would like to talk to us about gifting assets to your children, please contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.
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