Rising cost of living, concerns about IHT and the challenges that the younger generations are facing, have led to more families gifting their inheritance sooner rather than later.
Data reveals that 60,000 searches for “inheritance tax” occur each month in the UK, while an FOI request from HMRC reveals a 48% surge in families choosing to distribute their wealth before their passing over the past ten years. Research by Barclays also reveals that more than three in four 40-year-olds have already received some form of inheritance from their parents, with the majority putting this to use in savings and investments, businesses, or buying their first property.
Following on from this trend, the legal experts at Weightmans have investigated the rise in early inheritance gifting across the UK.
Homeownership Amidst Rising Living Costs
With soaring prices, many find themselves without the necessary assets or financial footing to enter the market. Familial support has become essential for many of this younger generation. With house prices escalating and the affordability gap widening, helping to buy a house is the most common scenario where financial support is given.
Data from Schroders reveals that the average house price in the UK is now approximately nine times the average annual income.
Marriage in Economically Turbulent Times
Data from the IFS shows that 18% of soon-to-be-wed individuals receive inheritance gifts. In 2022, the average wedding in the UK cost a staggering £18,400, underscoring the substantial financial undertakings associated with marriage.
According to research from Wealthify, over 35% of UK parents plan to contribute to their children’s future weddings. Londoners are most likely to support their children’s future ceremonies financially, with 1 in 17 parents saying they will spend between £40,000 to £50,000 and 1 in 13 planning to spend more than £50,000.
Other reported uses for Inheritance Gifts
Other reported uses for inheritance gifts include savings or investments (15%), Non-cash gifts (15%), general living expenses (6%), paying off debts (5%), major family expenses (5%), purchasing a car or driving lessons (4%), going on holiday (2%) and Educational expenses (2%).
Pros and Cons of Early Inheritance Gifting
Pros of Early Inheritance Gifting
- Mitigating Inheritance Tax: The UK’s IHT threshold stands at £325,000. Gifting assets early can reduce the value of an estate. Gifts made more than seven years before a person’s death are typically exempt from IHT, providing a significant tax advantage.
- Immediate Financial Support: Younger generations can benefit greatly from early financial assistance. This can help them on to the property ladder or with further education.
- Potential for Asset Growth: The UK’s investment landscape offers opportunities – by receiving assets earlier, heirs can strategically grow their inheritance.
Cons of Early Inheritance Gifting
- Financial Security risks for person making the gift: The rising costs of care in the UK mean the individual making a gift needs to ensure they retain enough assets to cover potential future expenses.
- Complex Tax Implications: While there are IHT advantages, other tax implications can arise. For instance, gifting a property that isn’t a primary residence might incur a Capital Gains Tax on any increase in its value.
- Irreversibility: Once assets are transferred, taking them back is legally complex and can be emotionally fraught.
Richard Bate, Partner and Head of Private Wealth at Weightmans comments, “We are increasingly seeing that our clients are more attuned to the idea of making lifetime gifts due to the increasing prominence of Inheritance Tax and the cost of living in 2023.
In general population terms, the baby boomer generation is at retirement age owning property and with a comfortable retirement income. They can see that their children and grandchildren are going to find it more difficult to attain the same level of financial security and want to help.
If individuals are thinking about early inheritance gifting while they are alive, it’s important to take into consideration how and why you are gifting this inheritance. If you are gifting for tax reasons, be aware of the value of your estate, will gifting bring you under the UK’s IHT threshold at £325,000? While there are IHT advantages, other tax implications can arise. For instance, gifting a property that isn’t a primary residence might incur a Capital Gains Tax on any increase in its value. The gifts should be final, meaning you can’t take them back, to avoid any tax complications. Once assets are transferred, taking them back is legally complex and can be emotionally fraught. If a beneficiary faces legal or matrimonial issues or financial troubles, those assets might be compromised.
Therefore, it’s really important to talk to a professional and get advice on early inheritance gifting to ensure you’re keeping your finances safe and secure.”
You can view the full research here: https://www.weightmans.com/insights/the-shift-to-early-inheritance-gifting/
