The optimal timing of an inheritance can be tricky.
Do you pass on wealth to your children in your will, once you have died, or is it better to make gifts during your lifetime, when you are alive to witness the benefit?
One advantage of passing on an inheritance during your lifetime is the ability to reduce the amount of inheritance tax paid by your beneficiaries.
Some new research has found that 6.9 million parents have passed on an early inheritance in a bid to reduce future tax bills. The research from Direct Line Life Insurance found that 20% of parents gave a total of £227 billion in early inheritance to their children. That’s an average of £32,920 each.
A further 19% of parents, or 6.5 million people, were found to have plans to transfer assets to their children to avoid a large inheritance tax bill.
Of those who haven’t considered giving their children their inheritance early, 34% said they did not have any assets to transfer, while more than one in ten indicated that they might, but that their children were presently too young to be gifted money.
A further 13% were concerned that they might need their assets in retirement.
This is a particularly important consideration that can be addressed by creating a lifetime cash flow forecast. Within the forecast, we often help clients model the long-term impact and affordability of making gifts to their children.
Nobody wants to run out of money during their lifetime, so when gifting an early inheritance to children, it’s important to understand what this means for our own retirement and care fees planning.
The research also found that 13% of parents believe their children should not be provided for when they are still alive. Nearly one in ten parents were unaware that gifting money could reduce the size of an inheritance tax bill on their subsequent death.
A rising divorce rate is a factor making inheritance tax planning more complicated. This has led, in some cases, to divorcees making an early inheritance to beneficiaries in order to avoid money going to a new partner, or their children, should they remarry.
Direct Line found that 15% of divorcees have already transferred assets to their children or has placed them in trust, gifting on average £16,602.80. Another 37% of divorcees plan to transfer money in future if they remarry.
Almost a quarter of divorced parents made these transfers because they are concerned that their new partner would not provide for their beneficiaries in the event of their death.
Jane Morgan, Business Manager at Direct Line Life Insurance, said:
“Worrying about what happens to your children when you’re no longer around is natural for any parent and it is understandable that people want to maximise the money they leave behind. However, it is important that people planning to transfer money understand the tax implications that a gift might give rise to.”
“With almost one in ten (nine per cent) parents placing their assets into trust, this is something people should also consider when arranging their life insurance. Placing a life insurance policy into a trust could avoid payments being included in inheritance tax calculations. However, despite this, just 20 per cent of people with a life insurance policy have placed this into trust and almost a fifth of those with a life insurance policy admit they did not know this was an option.”
If you’re thinking about leaving an early inheritance, it pays to take professional advice.
There are a number of different strategies that can be used when making lifetime gifts, including the use of trusts which can be very tax efficient and allow you to retain some control.
Do speak to us for advice on this area.