Inheritance has long been a traditional method of passing on wealth and assets to future generations. However, a shift in mindset towards lifetime gifting is gaining momentum for several compelling reasons. Whilst the decision to gift during one's lifetime over leaving an inheritance may seem unconventional to some, it offers numerous benefits that can positively impact both the gift giver and the recipient.
Immediate impact
One of the most significant advantages of gifting during your lifetime is the ability to witness the impact firsthand. Rather than waiting until after you're gone, you can enjoy seeing your loved ones benefit from your generosity in real-time.
As of February 2024, the average house price in England is £263,900, a significant increase from £188,265 in January 2014. This means that more and more people are getting caught in the renter’s cycle and they are not able to get onto the property ladder themselves. A new government-backed mortgage scheme was introduced on 19th April 2021 to help people with 5% deposits to get on the housing ladder. This scheme is currently in place until June 2025. With the availability of a 5% mortgage, this in theory makes it easier to get on the property ladder, therefore, a financial gift during your lifetime could mean that you will be able to enjoy seeing your relative build their future in their own home.
Whether it's funding higher education, supporting entrepreneurial ventures or simply providing financial assistance during challenging times, the joy of making a difference while you're alive is unparalleled.
Reducing tax liability
Lifetime gifting can be a strategic financial planning tool for minimising the inheritance tax bill that your beneficiaries will be left with. When you pass away, all of your assets are grouped together in terms of value into what is known as an estate. Your estate is then liable to inheritance tax dependent upon the value. If the value of your assets is less than £325,000 then no inheritance tax is payable. This is known as the nil-rate-band. For any value over £325,000, the value is taxed at 40%. If you have direct descendants, such as children, and own your home, you also have a residence nil rate band of £175,000, that totals £500,000 per person or a married couple can have a combined Nil Rate Band of £1,000,000.
You start to lose the residence nil rate band if your estate exceeds £2,000,000.
You can gift a total of £3,000 for the 2024/25 tax year without this being added to the value of your estate. If you haven't used any of your gifting allowance in the last tax year, you can carry forward this relief and give away a total of £6,000 in the 2024/25 tax year. You can also give as many gifts of up to £250 per person as you want each tax year, as long as you have not used another allowance on the same person.
7 is the magic number when it comes to gifting. 7-years is the length of time for any gifts to be counted as outside of your estate. This means that if 7-years have passed between the gift and your passing, it is not subject to inheritance tax. If you were to pass away within the 7-years of a gift being made, then the heir could still face a tax bill, but not at the whole 40% as the rate tapers after the first year.
Some gifts are exempt from Inheritance Tax. There’s no inheritance tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they are permanent UK residents and are legally your spouse or civil partner. There’s also no inheritance tax to pay on any gifts you give to charities or political parties.
Fostering family harmony
Inheritance disputes are not uncommon and can lead to strained relationships amongst family members. By gifting during your lifetime, you can proactively address any potential conflicts and ensure that your intentions are clear. Open communication about your gifting strategy can foster understanding and harmony within your family, promoting unity and cohesion for generations to come.
Personal fulfilment
Perhaps most importantly, beyond financial considerations, gifting during your lifetime can bring profound personal fulfilment. Knowing that you've made a positive impact on the lives of your loved ones and contributed to their success and well-being can be immensely rewarding. The act of giving not only enriches the lives of others but also enhances your own sense of purpose and fulfilment.
While the tradition of leaving an inheritance has its merits, the benefits of gifting during your lifetime are undeniable. From experiencing the immediate impact of your generosity to fostering financial stability, lifetime gifting offers a myriad of advantages for both the giver and the recipient. Embracing this approach not only allows you to leave a lasting legacy but also enriches the lives of those you cherish most. As you contemplate your estate planning decisions, consider the transformative power of giving during your lifetime and the legacy it can create.
Want to hear more?
If you intend to give gifts during your lifetime, it's crucial to think about how it will impact your future financial objectives. Through working with a Lync Wealth financial adviser, they will be able to factor this into your financial planning to ensure you can experience that personal fulfilment of helping your loved ones as well as ensuring you have enough income to have the retirement that you have worked hard for.
*Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Inheritance Tax.
