If you plan on passing wealth down to loved ones, you may assume that your main (or only) option is to bequeath after death. Yet there is also the option of gifting assets to loved ones during your lifetime. Which option is best – particularly when it comes to mitigating inheritance tax (IHT) on an estate? Below, our Carlisle financial planners at Vesta Wealth explore the benefits and drawbacks of leaving an inheritance compared to lifetime gifting.
The pros & cons of leaving an inheritance
In a sense, parting with all of your wealth after death can feel more efficient and “natural”. It allows you to keep enjoying the property, possessions and assets you have accumulated until your final days. After your passing, the administration of your entire estate occurs at the same time (by your executors; or, by an official administrator if no executor is named in your will).
If you are worried about how your wealth will be “spent” by loved ones after your death, you can still exert control via trusts. An “interest in possession” trust, for instance, requires the trustee(s) to pass all income from the trust to beneficiaries as it arises (e.g. dividends from shares). With discretionary trusts, your trustees can set aside capital for a future need – such as a beneficiary making a deposit on a first mortgage – or use judgement about if, and how, a specific beneficiary receives capital if he/she is not very responsible with money.
However, the UK tax system does not always allow for a seamless transfer of wealth upon an estate owner’s death. It takes time to administer an estate. This may involve the beneficiaries applying for probate (to deal with certain assets). If a will is absent, then the process can take even longer as different individuals decide who is the “most entitled person” to deal with the estate (i.e. the closest living relative). The UK’s intestacy rules will then decide who inherits which aspects of the estate, which may not follow the owner’s wishes whilst they were still alive.
These issues can contribute to family conflict. If the division and handling of the estate are seen as unfair, or unclear, then family relationships can suffer if deep-seated disputes emerge (which is often made more likely by grief and “high emotions” after losing a loved one). Finally, leaving an estate to be inherited after death is not always the most tax-efficient option, as shown below.
The pros & cons of lifetime gifting
One of the biggest joys of giving away wealth during your lifetime is that you get to see your loved ones enjoy it, spending it in a manner that could transform their lives (e.g. helping them get onto the housing ladder). You can also, often, enjoy a quicker and more seamless wealth transfer. If you want to give £1,000 to your adult child as a wedding gift, for example, then you simply log into your bank account and make the transfer. Giving during your lifetime can also allow for greater control over your wealth. If you give £1,000 to a loved one upon a specific condition (e.g. it must be used to buy a family car), then you are alive to check on this and ask your recipient to explain their actions if your wishes are not honoured. Another important benefit of living gifting is the potential tax-saving opportunity. In the UK, certain tax rules can enable an estate owner to mitigate a future IHT liability with some careful planning. For instance, you can give away up to £3,000 from your estate every financial year, tax-free, via the Annual Exemption rules. Over time, this could add up to a significant sum. Making full use of it over ten years, for instance, could remove £30,000 from your estate out of IHT liability.
Lifetime gifting does come with its risks, however. If you make a large gift (i.e. outside of your Annual Exemption) and you die within 7 years of making it, then inheritance tax may be due on the gift – albeit perhaps at a lower rate, depending on how much time has passed. There is also no guarantee that your loved ones will use your gift in the manner you want, even if you are still alive to witness it. If your beneficiary is inexperienced, impulsive with money or encounters hard times (such as a divorce) then your money might not be spent as you would like. When gifting wealth during your lifetime, you also need to be mindful of how other loved ones might perceive your gift to a particular person. How do you avoid feelings of jealousy, for instance? Sometimes, this danger can be avoided with careful planning – e.g. giving a one-off gift to each child at the same time. However, you cannot always prepare for an individual’s reaction to how you deal with your estate, even with the best planning and intentions.
Invitation
If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.
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This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.