There is an old saying that goes: It is far better to give with a warm hand than to give with a cold one.
This may sound a bit morbid but the premise, as Capital Asset Management (CAS) notes, is that “any gifts or inheritance made to children, grandchildren, family, friends or charity when the donor is alive to see the benefits and results first-hand is far more advantageous than a solicitor reading your will in a darkened room with a sombre atmosphere”.
With so many more people living into their 90’s and beyond – numbers have tripled since the early 1980s – “children” inheriting via a will could well be into their 60’s, by which time they may have already suffered unnecessary financial hardship.
The trend is in some ways a negative for potential gifters.
CAS states: “The main factor that stops people from transferring their wealth when they are still in their 50s, 60s or 70s is the worry they will still need the money in future for their own wellbeing, and would rather maintain the security of having that money to dip into as and when they need it. Having enough money to last you, say to the age of 100, is a key factor that should not be overlooked.”
Nevertheless, on the positive, a gift can be of much greater value to a younger life, so if you can afford to do so the incentive is there.
CAS goes on: “On average, people in their late 20s to 30s tend to need the most financial help. It is still early on in their career, they are trying to get on the property ladder, and starting their own family. These are the times in people’s lives when a financial gift from their parents can make a life-changing difference. The gifts of peace of mind and freedom from money worries are huge.”
It could go towards the purchase of a home; become mortgage free; pay for private or special needs education; repay those student loan debts; or fund a new business start-up.
Six in 10 parents and grandparents intend to pass on money before they die, according to the Openwork Partnership, a financial advice provider.
The report, released earlier this year, found that the next generation can expect to inherit more than £293 billion overall.
On average, children and grandchildren can look forward to an early inheritance of nearly £9,500 each.
However, some could get a lot more, with one in nine (11 per cent) of parents and grandparents planning to give more than £25,000 each. Conversely, 27 per cent – the equivalent of 8.5 million – are not planning to give anything.
How best to go about it then?
For a gift, usually a significant one, to be discounted for inheritance tax purposes, the donor needs to survive seven years. The gift is deemed a Potentially Exempt Transfer (PET), with the potential tax liability tapered down from 40 per cent to nil between years three and seven.
Smaller annual exemptions of £3,000 apply and gifts of up to £5,000 can be made upon marriage. A further allowance is available to gift excess income not needed by the donor.
However, there can be snags.
Beneficiaries could squander your hard-earned money. In addition a beneficiary may have to share an inheritance if their relationship breaks down, resulting in family money not passing down the bloodline.
Hence, discussions with family and professional advisers are essential.
Nevertheless, if you prefer not to donate 40 per cent of your lifetime savings to HM Revenue & Customs, giving with warm hands may increase the chances of success.