The pros and cons of giving money to loved ones during your lifetime

In the past, passing on wealth to loved ones usually involved leaving an inheritance. However, more parents and grandparents are choosing to give financial gifts during their lifetime. It can help family members achieve milestones, but it also needs careful consideration around how it’ll affect your financial security.

Older generations are gifting billions of pounds each year

Research shows that older family members are gifting billions of pounds each year to provide day-to-day support for loved ones.

According to Legal and General nearly half of older people provide some sort of financial support to family members. Around four in ten (39%) of young adults receive regular support that helps cover monthly outgoings. The average amount provided is £113 per month, collectively adding up to £372 million each month. This amount increased even further in 2020 as families faced financial pressures caused by the pandemic. It’s estimated that an extra £1.9 billion was gifted to younger family members in 2020.

Rising costs and stagnant wages may mean some younger family members are struggling to make ends meet. As a result, you may want to help by providing a regular gift to supplement their income.

Many parents and grandparents are also providing a lump sum gift to help younger generations reach milestones. As house prices have increased, it’s become common for first-time buyers to rely on the Bank of Mum and Dad. According to Legal & General, one in two house purchases among under-35s are made with the support of family. It’s expected that older generations will lend £2.1 billion to support homeownership plans in 2021 alone.

On average, the Bank of Mum and Dad provides £19,000, with 71% of first-time buyers saying they would not have been likely to buy without financial support. In most cases, this support is a gift – just 30% are expected to pay some of it back.

Why lifetime giving could be valuable

1. It could help loved ones tackle challenges they’re facing now

The appeal of giving during your life is that it can help loved ones overcome the challenges they face now and set them up for greater financial security in the future.

Giving a house deposit is a good example of this. A lump-sum gift during your lifetime can mean children or grandchildren can get on the property ladder. It could help reduce monthly outgoings if they’re currently paying rent and mean they’re mortgage-free sooner in life. Helping pay for educational costs can also make sense and help loved ones achieve career aspirations.

Giving during your lifetime also means you get to see the benefits your wealth brings to loved ones.

2. It could reduce Inheritance Tax liability

If Inheritance Tax (IHT) is a concern, gifting during your lifetime can also form part of the solution.

If the value of your estate, which includes all your assets, is over £325,000, IHT may be due. An additional allowance can increase this threshold to £500,000 if you leave your main home to children or grandchildren, so it’s important to think about who you’d like to inherit assets when considering IHT. In some cases, gifting to reduce the value of your estate can make sense from a tax perspective.

However, it’s important to keep in mind that not all gifts will be considered outside of your estate for Inheritance Tax purposes immediately. Some may still be included for up to seven years after they are given. If IHT is one of the reasons you want to gift during your lifetime, it’s important to understand allowances and rules. Please get in touch to discuss your options.

Drawbacks to consider before gifting

1. It could affect your financial security later in life

Before you gift money, it important to understand how it could affect your plans. Taking a lump sum out of your pension to act as a deposit for a child’s house, for example, could mean you’re not able to achieve goals in your later years. Before deciding to provide gifts, you should take some time to assess the impact it will have. This step means you can lend support while safe in the knowledge that your plans are still on track.

You should also assess the impact if something unexpected were to happen. Even the best-laid plans can be affected by unforeseen circumstances. For example, would you still be able to afford the type of care you’d prefer if it were needed after gifting? Or would your pension now be able to stretch for another ten years if you lived longer than expected? Answering these questions can be difficult, but we’re here to help.

2. It could affect the inheritance you leave behind

It’s also important that you keep in mind how gifting now could affect the inheritance you leave to loved ones. In some cases, gifting now could have a significant impact on your assets later in life. Deciding what your priorities are before gifting can help ensure that the decisions you make reflect your goals.

If gifting now will affect the inheritance you leave, you should consider speaking to your beneficiaries. They may be expecting an inheritance to help them achieve goals later in life, such as providing a more comfortable retirement. Knowing what they can expect can help loved ones create a financial plan that suits them.

Balancing family support and your plans

When you want to lend financial support to loved ones but aren’t sure how it’d affect your plans in the long term, it can be difficult to know what to do. Financial planning can give you confidence in the decisions you make. Using cashflow planning, we’ll help you see how making regular or one-off gifts will affect your security, including if something unexpected happens. It can mean you’re able to support the people important to you while knowing your own plans are secure.

Please contact us if you’re thinking about financially supporting your family and would like to understand the long-term implications.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

Levels and bases of, and relief from, taxation are subject to change.

The Financial Conduct Authority does not regulate estate and tax planning.