Why you should gift your adult children their inheritance early

family finances, inheritance

Why you should gift your adult children their inheritance early

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4 minute read

There is an old saying that goes: It is far better to give with a warm hand than to give with a cold one. The premise is that any gifts or inheritance made to children, grandchildren, family, friends or charity when the donor is alive to see the benefits and life-changing results first-hand is far more advantageous than a solicitor reading your will in a darkened room with a sombre atmosphere.

The age-old tradition is that your worldly goods and chattels, land and property are divided between your heirs and beneficiaries after death, by way of your will. However, the number of people in the UK that are living beyond 90 years of age has tripled since the early 1980s.

This means that by the time some children receive their inheritance from their parents, they are likely to be in their 60s or older. By then, many will have paid off their mortgage and other debts, are successful in their career or retired, and their children have passed the age of full-time education.

These ‘adult children’ generally have little use for the recently inherited money themselves, so the wealth their parents worked their life to achieve sits in a bank account ready to be passed on to their own children (and the tax man) in another 30 years’ time. And so the cycle continues.

So, when is the ideal time to share your wealth?

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 wealth gifted to children at this age could be used to:

  • purchase a home; possibly larger than they could afford on their own or in a nicer area with better schools, which would potentially benefit a third generation;
  • become mortgage free, meaning that the saved monthly mortgage costs could be added to retirement planning pots (and gain tax relief) or be invested into ISAs and the like;
  • pay for private or special needs education;
  • help them to fully repay any student loan debts;
  • fund a new business start-up that they are passionate about;
  • and generally, give the family a better lifestyle and improved wellbeing with fewer financial concerns.

The gifts of peace of mind and freedom from money worries are huge and have a very highly positive effect.

What can you do to ensure your gifted wealth is looked after carefully?

According to The Williams Group, inherited wealth rarely survives the next generation, let alone a third generation; it will be spent or squandered. In fact, it is so unusual for money or a business to continue through family generations that Berry Bros & Rudd, the UK wine merchants, are often the rare example used, with a 320 year-old succession, having traded from the same shop since 1698.

Before considering a financial gift of substance whilst you are still alive involves much planning and preparation. After all, you don’t want to run out of money during your own dotage. The problem is that nobody can predict the future, so you must be careful.

Added to this risk is what we call ‘The Law of Unintended Consequences’ where, despite your very best intentions, the outcome goes badly wrong. Example: you have a reckless son who can’t hold down a job and who is always out of money, and who is a ‘sofa surfer’ in what you believe are undesirable homes.

What (you think) he needs is his own new apartment to give him some stability, and a nice roof over his head. So, you help him to buy one in a good local neighbourhood. Job done. Within three months he has sold it and banked the cash and, after another six months, his undesirable ‘friends’ have helped him to waste every penny. He is back knocking on your front door.

So, it is important to thoroughly contemplate if your child (or any other donee) is mature enough to deal with the amount of money you are planning to give them because transferring their inheritance to your child too early could mean they fritter it away and are less driven in their career.

This is a difficult thing to do when you are so close emotionally and find it difficult to make dispassionate decisions. Who can you turn to for guidance? Well you may want to hold an inter-generational meeting with your financial planner, who can bring the family together and help with the agenda and the awkward issues.

Things to consider before gifting a hefty sum of your wealth

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. Once you’ve gifted the money, it’s gone. In fact, HMRC have got this covered in Section 102 of the Finance Act 1986, in what is known as the Gift with Reservation of Benefit (GROB) clause. No strings attached, please. These can be complex and technical legal rules, and as such are not covered fully in this blog. See UK Gov Inheritance tax manual for more information, or consult a solicitor.

Capital help clients with these long-term and important family decisions, by way of FutureMap™ which does what it says on the tin. It’s a map of your future, in numbers and charts. Once in use, it quickly becomes clear whether a capital or regular income gift can be made, how much and when, without the fear of running out of money before age 100.

Passing on your wealth in the most tax-efficient way – the financial stuff

The advantage of giving your children their inheritance when they are in their late 20s or 30s can be very economical. Currently (UK March 2018) residual estates are taxed at 40% on anything you leave above £325,000 after you die, or £650,000 if you are a couple in a formal relationship. However, if you gift money before you die, and live seven years or more after the gift was made, it should not be counted as part of your estate and may avoid inheritance tax.

If you would like to discuss the possibility of passing down some of your children's inheritance early click here to contact Capital who will be happy to help you; or alternatively, speak to your Capital financial planner at your next annual meeting.

At Capital, we believe in giving with a warm hand, not a cold hand.

Please note that tax advice is not regulated by the FCA.

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