What to think about before agreeing to give an early inheritance

Elderly man with his young grandchild

Many parents would like to support their adult children by giving an early inheritance – and many children would appreciate a financial boost – but what’s involved?

By Steve Smethurst

Almost half of the respondents (46%) to a recent Aviva survey said that the only way they'll ever own property is through inheritance. We know that parents and grandparents often want to help their children and grandchildren get on the property ladder, but don’t know how to do it. 

And there will be many grown-up children who'd appreciate some financial support, but don’t know how to raise such a tricky subject. It’s the kind of situation that can create awkward family gatherings.

One of the big factors in this scenario is inheritance tax (IHT), the 40% tax on the estate – property, money and possessions – paid when someone dies. It applies to the assets of an estate above £325,000 (£650,000 for married couples or civil partners). 

Once derided as the ‘death tax’, it’s now the scourge of the ‘accidentally rich’ – families whose property values have rocketed over their lifetimes, and who don’t want to see a big chunk disappear in tax.

The seven-year rule

If you make ‘early inheritance’ gifts seven or more years before your death (‘the seven-year rule’), the giftee won't have to pay IHT. The people you give gifts to will be only be charged IHT if you give away more than £325,000 in the seven years before your death, although only the balance over £325,000 will be taxed retrospectively.

However, if you die within that period, there’s a sliding scale of liability. For example, they’d pay 40% if you died within three years, and 24% if it was between four and five years. It’s also worth noting that you can give away £3,000 worth of gifts each tax year without them being added to the value of your estate. 

IHT isn’t without its critics. The pressure group Taxpayers’ Alliance 1 says it is “distortionary, unfair and very unpopular”. It argues that “the scope for avoidance through tax planning means that IHT is a tax on unlucky people whose benefactors either died unexpectedly or who felt unable to afford professional advice.”

You can give away £3,000 worth of gifts each tax year without them being added to the value of your estate.

Other groups have sought to change the rules recently too. The all-party parliamentary group (APPG) on inheritance and intergenerational fairness reference younger generations struggling to get the same secure employment, affordable housing and valuable benefits as their older counterparts. They're calling for amendments to IHT, such as replacing the seven-year rule with a 10% tax on all lifetime gifts above £30,000 each year.

Likewise, the Office of Tax Simplification, an independent adviser to the government, has recommended that the seven years be reduced to five years and the abolition of tapered-relief. It'd also like to see small-gifts’ level re-examined 2.

Record-keeping is key

According to the government's Money and Advice Service 3, if you're planning to give away money or assets to reduce IHT, it's important to make a record of what you gave, who you gave it to, when you gave it and how much it's worth.

It might also make things clearer (in legal terms, at least) if parents or grandparents should ever want their gift back. The legal definition of a gift is “the voluntary transfer of property from one individual to another made gratuitously to the recipient”. 

Make a record of what you gave, who you gave it to, when you gave it and how much it's worth.

The word ‘gratuitously’ means that the giver of the gift must be happy at the date they made the gift that they made it without receiving anything in return. A legal agreement would otherwise be necessary to specify any conditions on the ‘gift’.

Many people will also insure their life – ensuring a cash pay-out for dependents on their death – but as the average age of inheritance is 61, this may not immediately help any children who may want to enjoy many more years with their parents as well as getting a foothold on the housing ladder.

A third option is to look at equity release. This refers to a range of products offering access to the equity (cash) tied up in your home if you're over 55. You can take the money you release as a lump sum or, in several smaller amounts or as a combination of both. Again, the Money Advice Service has plenty of advice on this 4.

Greg Neilson, managing director, retirement, at Aviva, says that equity release is increasingly being used for wealth management and intergenerational gifting can be a way to manage the size of an inheritance tax bill. 

However, he cautions: “With an increasing proportion of wealth tied up in property, more people are looking for ways to optimise their overall financial position, but decisions like these should always be taken with full financial advice.”

All rules are subject to change

What’s clear is that while IHT is here, for now, the pressure is on for a change. Some countries, such as Japan, have high rates of IHT to pay for the ageing population. Others, such as India, Austria, Hong Kong, Sweden, Canada, New Zealand and Australia have no inheritance tax on death at all. The UK may well change its rules in the coming months, so make sure you keep an out for any alterations to inheritance rules.

For more information on IHT and probate, visit gov.uk/inheritance-tax/gifts or call the government helpline on 0300 123 1072.

How to bring up inheritance with your parents, by Robert Sanders

1. Do your homework

Make sure you understand everything about the process and the options so you can create a good impression if the subject comes up.

Spend time putting yourself in your parents' position to see things from their point of view. Consider how they might benefit from such an arrangement. What's most important to them? Perhaps it would mean you could live closer to them, for example.

2. Make sure you're in rapport

Don't just jump in and introduce the subject. Choose a time when you are getting on well and enjoying each others’ company. Be a listener first and be genuinely interested in them before you introduce the subject.

3. Pace the conversation

Start the conversation by focusing on a topic that they can be comfortable with and that follows naturally. A story is good – perhaps about someone who has already done something similar.

Or perhaps just talk about the arrangements you have put into place for your dependents. Be open about your finances. Talk about your life insurance or your will. Talk about your hopes and fears. Seek their advice and wisdom. 

4. Take your time

Choose your time to raise the subject, and when you do, be ready to move the topic on if you sense any resistance. Sow seeds. Give them space to think about it in their own time.

5. Be patient, flexible and let go of the outcome

Don't let this become a sore point between you. You have no control of the outcome, but you do have control of your expectations.

Robert Sanders is a coach, therapist and master practitioner in neurolinguistic programming www.robertsanders.me.uk

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