Many people keen to pass on wealth to younger family members need help to decide the best way to structure their financial gifts.
The number of people making financial gifts to their relatives continues to increase, research by M&G Wealth shows, highlighting the growing opportunities for advisers to help families manage the potential complexities of making lifetime gifts.
The firm’s third annual Family Wealth Unlocked report – which questioned 2,000 people who have previously taken financial advice – found that 84 per cent had received a financial gift in the past year, up from 77 per cent in 2022. High levels of concern about the cost of living were reported across all age groups, prompting a growing desire to take care of relatives who are under pressure.
The rules around gifting
Gifting is an ideal way to answer this need, but this year’s Family Wealth Unlocked report uncovers a range of issues that families need to be aware of when deciding how best to support younger generations.
“The idea of lifetime giving rather than inheritance is popular, partly because it means that the older generation gets to see their family members benefitting from the money. A gift could help a child or grandchild buy a property or support them through university, for example,” says Les Cameron, head of technical at M&G Wealth.
Where relatively small sums – perhaps a few thousand pounds – are concerned, problems with gifting are less likely. But in the case of larger gifts, families will need expert advice to ensure they make the right choices.
The inheritance tax net widens
Large financial gifts can raise a range of legal and tax issues, such as inheritance tax (IHT).
One factor in decisions to make lifetime gifts is the opportunity to remove the money from the giver’s estate for IHT purposes. However, there are rules around this that must be taken into account. “People who make lifetime gifts need to be aware that they’re potentially subject to the seven-year rule, meaning the money they pass on remains part of their estate for tax purposes for seven years after they make the gift,” says Cameron.
The tax question is looming larger because the tax-free individual threshold for IHT has been frozen at £325,000 since the 2009/10 tax year and is expected to remain so until at least April 2028, by which time receipts are predicted to hit £8bn a year. In the decade from 2012/13 to 2021/22, the amount paid in IHT broadly doubled to £6.1bn a year1.
Addressing common worries
The Family Wealth Unlocked report highlights further concerns about lifetime gifting. Around 20 per cent of respondents feared family members might squander the money they received, while 22 per cent worried they might need it themselves further down the line.
There are ways to address these concerns. By using standard, off-the-shelf trusts, benefactors can retain a degree of control over who benefits, when, and by how much, while some types of trust can allow them to retain some access to the money.
