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What are the pros and cons of giving money to my adult children now versus leaving an inheritance after I die?

Does the idea of helping your children both now and in the future sound appealing? By making financial gifts during your lifetime instead of after your death, you can do just that.

What are the main benefits of making lifetime gifts?

Help when it’s most needed

The main appeal of making lifetime gifts is seeing your children benefit from the money when they need it most. People often need financial assistance when they are younger, usually in their 20s or 30s. They may need help to come up with a house deposit, or to pay towards private school fees for their own children.

There’s often an assumption that passing on money happens as an inheritance after you die but by this time, your children may well be quite old themselves and the stage in life where they really need the money is over.

Inheritance Tax exemptions

You can make full use of your Inheritance Tax exemptions if you give away money to your children during your lifetime. Several of these cannot be used on death so when you die, effectively, they die with you.

One of the most useful of these is the normal expenditure out of income exemption. To qualify for this exemption, there are three key requirements:

  • The gifts must be regular
  • They must come from your income (i.e. not from capital savings)
  • They must not have an impact on your standard of living.

This exemption isn’t capped and gifts can be stopped if circumstances change. 

Using your annual exemption is another useful way to give away your money. Every year, you are given a £3,000 allowance for making lifetime gifts – your annual exemption. You can use your allowance to make a gift as a lump sum or split it into smaller amounts throughout the year. Any unused allowance can be carried forward one tax year, giving you an increased limit of up to £6,000.

If your child gets married or goes into a civil partnership, each parent can gift up to £5,000 prior to the ceremony taking place. This is in addition to your annual exemption.

Potentially exempt transfers

Any lifetime gift made which is in excess of the annual exemption will become a potentially exempt transfer. A potentially exempt transfer is a lifetime gift which is not taxed when it’s made. It will remain Inheritance Tax-free as long as you survive for seven years after making it. This is known as the seven year rule. If you die within this seven year period, the gift will become subject to Inheritance Tax.

Reducing the size of your estate

By making financial gifts during your lifetime, you can reduce the size of your estate and the amount of Inheritance Tax payable by your heirs. This means that you can help your children now – by giving them the money when they need it – and in the future by lowering the Inheritance Tax liability. You can pass on an estate up to the value of £325,000 (the nil rate band) without creating an Inheritance Tax bill. This amount will be lowered if any lifetime gifts you make are not covered by various exemptions, including those outlined here, and you die within seven years of making them.

What if I realise I need the money myself after I’ve given it away?

People tend to avoid lifetime gifting because of the fear that they might need the money themselves. This is a completely valid concern and ensuring that your own situation isn’t compromised by giving away assets before you die is essential. Cashflow modelling can help you to establish exactly how much money you need for your own future, how much you need to keep back as an emergency fund and how much you can comfortably afford to give away.

I’m not sure my child is responsible enough to manage this money effectively. What should I do?

Some people are reluctant to make lifetime gifts to their adult children because they worry that they will not exercise enough financial responsibility when they receive it. Also, some worry that the gift might form part of a future divorce settlement or get swallowed up by a failing business. These fears can be managed by placing the money into a trust. You can retain some control here and make sure that the money is used for its intended reason by the intended recipient. Trusts can be set up for gifts made during your lifetime or on your death.

Talk to Tilney

Our experts can help with all aspects of gifting, estate planning and Inheritance Tax. To see how they can help you, book an initial consultation online or call us on 020 7189 2400.

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Issued by Tilney Financial Planning Limited.

Advice in relation to trusts and inheritance tax planning is not regulated by the Financial Conduct Authority, however, the products used in relation to trusts and to mitigate tax may be regulated.

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