Gift to my children now or later?
LEAVING a financial gift for your children depends on many factors. Should you give them anything at all (after all ‘I started with nothing' is a common response)? Should you have the benefit of seeing them benefit during your lifetime and assisting their family's financial security?
Much is down to how you think and there are many responses. But rarely do I see one that involves leaving it to a government.
Some advise that with rising life expectancy, it's quite difficult to calculate how much liquid cash you will need over the years. It is truly a conversation with an independent financial adviser around the implications of each and every decision and there's no getting away from the boredom of that!
It is now believed by some that life expectancy is dropping, given the Office of National Statistics recent information. The report said we will be living a year shorter and life expectancy has bottomed out. In 1981 a male lived to 70.9 years and a female to 76.9 years. In 2030 that is projected to be 81.9 and 86.9 respectively. By 2050 that rises to 84.5 years and 87.2 years for females.
The rates of growth after that continue to grow but not as much as had originally been thought. And so, keeping control of the correct amount of available income and cash is paramount.
The difficulty is that gifting an asset away and retaining control of it, will normally render it as a gift with reservation, and it all falls back into the estate to be calculated for inheritance tax (IHT).
Trusts were very popular to allow for a gift whilst retaining some control, but these have fallen out of fashion over the last decade. There are 27 per cent less trusts in existence today than ten years ago, largely down to the tax placed upon them by the government. They were simply there to place a control over children to ensure they didn't ‘blow their inheritance'.
Let's remember, however, you can each give away up to the nil rate band of £325,000 on death before any Inheritance Tax is payable. The remainder is taxed at 40 per cent. If you don't use your spouse's nil rate band on first death, that can be added to yours on second death to maximise IHT planning to £650,000.
Furthermore, if you leave your interest in your home to your children (includes step children, grandchildren, great grandchildren, adopted and foster children), your estate receives the benefit of the allowance brought in last year of the residence nil rate band.
In 2018, this is £125,000 which, when added to the nil rate band, equates to £450,000. The residence nil rate band rises to £175,000 by 2020/21. By then, married couples will be able to pass on £1 million free of inheritance tax. (You do however, begin to lose the benefit of the residence nil rate band once your estate is over £2 million, and it is completely gone at £2.25 million).
For many, this negates any inheritance tax gifts now, but for those wishing to gift, or in need of IHT planning there are many other options.
Personally I would like to see my children benefit and so easy options are to gift into pensions for them now, and attract tax relief as the capital goes in. They can't access it now and so can't squander, but it saves them having to make the monthly contribution they would normally need to out of their normal monthly budget.
You can gift as much as you like during your lifetime, but you have to live seven years for the capital to be completely outside the estate. Of course, you have annual exemptions each year, gifts for marriage, and any gift that is regular and out of normal expenditure will not fall inside the estate.
If you wished to help the children but wanted to ensure a divorce didn't take your cash away, simply paying their monthly mortgage (as long as you can afford it) would be regular and out of normal expenditure and wouldn't fall within the seven years.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have an IHT question, or would like some advice, call Darren McKeever on 028 6863 2692, email email@example.com or visit www.wwfp.net.