Giving while living: Should you pass on your wealth during your lifetime?

By London & Capital | 24 Nov, 2022

One of the most satisfying aspects of acquiring wealth is the knowledge that you can eventually pass it on to those you love. The greatest reward for a lifetime of hard work is moving into retirement with the comforting thought that you are able to provide for the people around you. Ensuring that your children and your spouse or partner are financially secure means you can have peace of mind as you move into your twilight years.

But passing on your wealth can be a complex affair. Inheritance and gifting in the United Kingdom are subject to a specific tax regime and it is important to be mindful of these details when you are planning the future of your estate, which is classed as your property, money and possessions.

The standard UK inheritance tax rate is 40%. This can fall to 36% on some assets if you leave 10% or more of the net value of your estate to charity in your will. The threshold for inheritance tax in the UK is £325,000 so there is usually nothing to pay if your estate is less than this amount. You typically don’t have to pay any tax above this threshold if you leave everything to your spouse, civil partner, a charity or a community amateur sports club. And your tax-free threshold can rise to £500,000 if you leave your home to your children or grandchildren and your estate is worth less than £2 million.

The value of gifts

Spousal inheritance may be tax-free, but anything over the thresholds will be taxed when passed to children, grandchildren or other beneficiaries. When it comes to larger sums, these thresholds can be breached very quickly so you may want to think about giving gifts to your children and grandchildren during your lifetime.

HM Revenue & Customs (HMRC) allows you to give away £3,000 as gifts each tax year without them being added to the value of your estate and you can pass much larger amounts tax-free as long as you do it more than seven years before your death. This can be a useful strategy for two reasons. Firstly, it potentially reduces the value of your estate and therefore how much inheritance tax you will be liable for when you pass away. Secondly, it provides you with a greater degree of control over where the money is going.

There are also potential drawbacks. If you have a large estate and you die less than seven years after giving away gifts of more than £325,000, then inheritance tax will be due. The exact amount owed will depend on the timing of your gift. If you die less than three years after making a gift, 40% tax will be due. However, if you die three to seven years after making the gift, you will be taxed on a sliding scale known as ‘taper relief’ which varies between 8% and 32%. There are also additional complexities to the inheritance tax rules which your financial adviser can explain further.

Taking care of your needs

Choosing ‘giving while living’ can be a difficult decision and concerns can include maintaining a certain lifestyle in retirement or facing unexpected expenses such as medical or caring fees. This choice can also be dependent on your level of wealth and the needs of your family. Additionally, these factors could change during your retirement, so decisions around what you can afford to give need to be regularly reviewed. A consistent dialogue with a trusted wealth advisor is recommended.

Cashflow modelling is an important supplementary tool and will lay out your income and expenditure along with your assets and debt. This will help you to forecast your finances into the future and ensure they stay healthy. It will also be important to understand the financial needs of your beneficiaries so that you can make sure any gifting or inheritance is balanced and proportionate. Some family members may welcome support early while others could be prepared to wait.

At London & Capital, we take pride in helping protect generational wealth. We know your legacy is important and we are passionate about assisting you in securing it.

To get in contact with London & Capital, please give us a call on +44 (0) 207 396 3388 or click here.

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