Traditionally, people passed on wealth to their loved ones once they passed away through a will. However, you might be considering gifting assets during your lifetime to create a living legacy. Read on to discover the pros and cons you may want to consider before deciding which option is right for you.
The benefits of passing on assets during your lifetime
A living legacy may allow you to help your loved ones when they need it most
One of the key drawbacks of a traditional inheritance is that they’re often received later in life when loved ones may be more financially secure. In contrast, a living legacy could provide you with a way to pass on assets at a time when they’ll benefit more.
Soaring house prices mean getting on the property ladder has become a challenge for many families. As a result, parents and grandparents are increasingly passing on wealth to act as a deposit.
According to the Institute for Fiscal Studies, around half of first-time buyers in their 20s receive financial help to buy their home. On average, they receive a gift of £25,000.
The research found that not only does this wealth transfer support home ownership goals but long-term wealth accumulation too. As those receiving financial help typically put down a larger deposit, the interest they pay on their mortgage could be thousands of pounds lower.
Helping loved ones step onto the property ladder isn’t the only reason you might want to gift assets now. Perhaps you want to fund university or private school, or pay off debt so their day-to-day finances improve.
Passing on assets during your lifetime could give you greater control over how they’re used
If you have a clear idea about how you’d like your beneficiaries to use the assets you’re passing on to them, doing so during your lifetime could provide you with greater control. For instance, if you want to ensure your grandchild goes to a private school, you could pay the fees directly.
It may be worth speaking to your family about their goals and the obstacles they face in reaching them. This could help you provide support in a way that suits both them and you.
Gifting might offer a way to reduce a potential Inheritance Tax bill
If the value of your estate exceeds Inheritance Tax (IHT) thresholds when you pass away, it could result in a large bill and less money going to your beneficiaries.
In 2023/24, the nil-rate band is £325,000 – if the value of your estate is below this threshold, no IHT is due. In addition, if you’re passing on some properties, including your main home, to direct descendants, you may be able to use the residence nil-rate band, which is £175,000 in 2023/24.
You can pass on unused allowances to your spouse or civil partner. So, as a couple, you could pass on up to £1 million before IHT is due.
If your estate could be liable for IHT, there may be steps you could take to reduce a potential bill, including passing on assets during your lifetime. However, not all assets are considered immediately outside of your estate for IHT purposes, and the rules can be complex. If you’re thinking about creating a living legacy to mitigate an IHT bill, we can help.
The drawbacks of a living legacy
Passing on wealth now could affect your long-term financial security
One of the key challenges of passing on wealth during your lifetime is understanding the long-term effect it could have on your financial security – would taking a lump sum out of your estate now potentially mean you need to make compromises later in life?
Making gifts part of your financial plan can help you understand the short- and long-term impact. It can give you confidence when you’re passing on assets that your finances are secure too.
A living legacy could affect the assets you leave behind as an inheritance
While a living legacy can be useful, you might still want to leave an inheritance behind for loved ones. Gifting could mean the amount they’ll receive after you’ve passed away is lower. So, if leaving assets in a will is important to you, assessing how a living legacy will affect your estate during your lifetime could be useful.
It might also be beneficial to have a conversation with your loved ones – do they understand how gifts they receive now could affect their inheritance? It may affect the financial decisions they make.
Gifting assets during your lifetime may make your estate plan more complex
Estate planning can be complex, and gifting during your lifetime could add to this.
You might gift one child a deposit to get on the property ladder, but your other child already owns their home – will you still provide them with a lump sum now or would they receive more through your will?
An estate plan that’s tailored to you could help you manage different goals and set out the best way to provide support for each of your beneficiaries. It can also help you take the steps necessary to ensure your wishes are followed, such as writing a will.
Arrange a meeting with us to talk about your living legacy
If you’d like to pass on wealth during your lifetime, it’s important you consider how it’ll affect your long-term finances and how to do it tax-efficiently. Making a living legacy part of your long-term financial plan could provide you with peace of mind while you support loved ones.
We could also help you assess other options, such as leaving an inheritance in a will or placing assets in a trust, to create an estate plan that suits you.
Please contact us to arrange a meeting.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, will writing, or legal services.
Approved by The Openwork Partnership on 05/01/2024.
