While we’re not always comfortable talking about money, increasingly people want to explore the best way to pass wealth to loved ones. With many of us reviewing our finances this could be the right time to sit down together for an honest conversation, whether in person or over Zoom or WhatsApp.
Gifting money to children
More and more people are keen to give money to the family while they’re still around to see the benefits, rather than just thinking of the inheritance they may leave behind. This approach brings the advantage of ensuring your children or grandchildren have financial support at key stages of their life, while as a parent you can actually watch them enjoy it. Money from a retirement savings fund is one way of doing this, but if you’re a homeowner, you could also consider unlocking cash from your home by downsizing or using equity release.
Gifting money is sometimes known as a ‘living inheritance’, and it’s often life’s big events that prompt people to share money in this way. For example, paying for a wedding, contributing towards university fees or providing money to start up a new business.
Bank of Mum and Dad
You may have heard of the ‘Bank of Mum and Dad’. With challenging times ahead of us economically children borrowing from their parents may become even more prevalent, as one-third of 18-24-year-olds have lost their jobs or been furloughed.
Gifting money for a house deposit
We spoke about sharing money in our Rewirement podcast series on modern retirement. Some of our guests had helped their children buy their first property. One guest’s daughter is now paying £200 per month less on her mortgage than on rent.
The recently announced stamp duty relief will create short term opportunities for first-time buyers. But as house prices remain stable, parents and grandparents may still need to provide funds to take advantage of the cuts. The temporary change to stamp duty makes downsizing more cost effective for parents looking to help children financially. Another option to free up cash for those who aren’t looking to move house, is equity release.
During one Rewirement podcast episode, one guest noted that we can underestimate our own spending habits. Financial expert Jasmine Birtles recommended that anyone considering gifting money should look at their last year’s bank statements to gauge how much they’ll need to finance their desired lifestyle. You should gift sensibly to avoid compromising your own standard of living, she added. Make sure you don’t leave yourself short.
The value of advice
Speaking to a financial adviser is highly recommended, as they can provide expert advice on your specific circumstances and help with the complexities of gifting money. Finding someone you trust can be highly beneficial – our podcast host Shirley Ballas has used the same financial adviser for the last 40 years!
There are tax implications to consider when gifting money to family members and these can impact the timing and amount of money given. You can give away £3,000 worth of gifts a year without any issues around inheritance tax and there are some other exemptions.
A key benefit of passing money on while still alive is that an outright gift is classed as a potentially exempt transfer (PET) for Inheritance Tax (IHT) purposes. This means that IHT will only apply if the donor dies within seven years of making the gift, which is a key point to remember. These tax benefits could be an incentive to start making plans before it’s too late.
Today’s retirement is very different to that of previous generations, largely because of the fact we’re living longer means retirement is a 20 or 30 year event for most people. It’s therefore essential to consider your life expectancy when thinking of sharing money. But our increased longevity also provides a huge opportunity for retirees to watch their children and grandchildren really enjoy their legacy first-hand.
Published: October 2020