The so-called “Great Wealth Transfer” is well underway and could, according to Vanguard, see £7 trillion pass between UK generations before 2050.
That’s a huge sum of money and one that raises questions about how best to pass on your own wealth, and when.
Giving with a warm hand, or “giving while living”, is a way to leave a legacy while you’re still around to see the difference your money makes. Opt for this approach and you might find that your loved ones receive an inheritance at a time of life when they need it most. And there could be tax benefits too.
Keep reading for a closer look at why you might opt to give with a warm hand and the three important factors you’ll need to consider.
You’ll need to know how much you can afford to give away
It’s common to leave an inheritance on death through your will. You can stipulate exactly who receives what, and the estate will be distributed in line with your wishes once all other outstanding debts and considerations have been made.
While your estate planning might have included some Inheritance Tax (IHT) mitigation, the value of your estate on death will determine the legacy you leave.
If you choose to pass on wealth while you’re still alive, you’ll need to factor in your ongoing budget. You’ll want to pass on wealth while ensuring you can continue to live your desired retirement lifestyle. Financial planning is vital here.
Through working with us, you’ll know what your dream retirement lifestyle looks like and how much that is likely to cost. On top of your own spending, you might be putting some money aside for your children or grandchildren. But if you want to fully commit to leaving a living legacy, there’s plenty we can do to help.
Cashflow forecasting can help you decide how much to give away, and when
By building a long-term relationship, we’ll understand your circumstances and your goals. When it comes to legacy planning, we can then use planning tools like cashflow modelling to work out exactly what you can afford.
There are a number of ways to gift wealth tax-efficiently using HMRC exemptions. First, though, it’s important to note that you can gift as much as you like during your lifetime IHT-free if you live for seven years after the date the gift is made. For this reason, gifting earlier in life can be incredibly tax-efficient.
If you do die within seven years of making the gift, it will form part of your estate.
IHT is generally paid at 40% and this rate will apply if you die within three years of making a gift. Survive for longer, and IHT is payable on a sliding scale known as “taper relief”. However, note that taper relief only applies where the cumulative value of gifts exceeds the value of the nil-rate band. Gifts below £325,000 will remain liable to the full rate of Inheritance Tax.
Source: HMRC
Some gifts, though, are IHT-free from the moment you make them, thanks to the:
- Annual exemption, which allows you to gift up to £3,000 in the 2025/26 tax year. Any unused amount can be carried forward to the next tax year and the allowance is individual to you.
- Small gifts exemption, which includes all gifts of up to £250 (as long as the same person hasn’t already benefited from any part of your annual exemption).
- “Normal expenditure out of income” exemption, which allows you to give regular gifts, as long as you can prove that:
- The money comes from your regular income
- The gift is part of your normal outgoings
- Giving the gift doesn’t harm your standard of living.
Cashflow modelling can help to calculate the impact of these gifts so you’ll know what you can afford to give without upending your own plans.
Contingency planning and knowing when to stop gifting and concentrate on you
Giving while living can have significant financial and non-financial benefits for you and your loved ones, but it’s important to know when to stop.
You’ve worked hard to save your retirement fund so you shouldn’t ever feel guilty about spending it. If you have travel plans, you won’t want your once-in-a-lifetime trips to be postponed because you can no longer afford them.
You might opt to bring your family along and use a gift to fund making memories; just remember that it’s your retirement and it’s ok to live it your way.
It’s also worth noting that your outgoings in retirement are unlikely to be uniform. You may find your expenses increase in later life, especially if some form of care is needed. Financial planning and cashflow modelling can be crucial here too, helping you to decide when your disposable income needs to form a later-life contingency.
Get in touch
We can help your perfect legacy whatever that looks like for you.
So, if you’re looking for an independent financial adviser in Milton Keynes or Olney, look no further. At Jane Smith Financial Planning, we’ve been helping clients for 30 years, so contact us at info@janesmithfinancial.com or call 01234 713131 to see what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning, or will writing.
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