Living inheritances: 4 valuable benefits for you and your family

If you’re planning to leave some of your wealth to your children and grandchildren, you don’t have to wait until you’re gone to do it.

A living inheritance allows you to pass on wealth to family during your lifetime. This may be particularly relevant when there is a generational wealth gap.

And, according to research published in FTAdviser, living inheritances are on the rise, potentially due to factors such as the rising cost of living and concerns about Inheritance Tax (IHT). 

Read on to learn more about the benefits of a living inheritance for you and your loved ones. 

1. Reduce the Inheritance Tax burden on your family

IHT may be due on your estate when you die if its value exceeds the £325,000 threshold. The standard IHT rate on assets that surpass the nil-rate band threshold is 40%.

If you leave everything to your spouse, civil partner or a charitable organisation, there is normally no IHT to pay. However, an increasing number of households are paying IHT, at least in part due to rising property prices and a freeze on IHT thresholds until 2028.

Gifting money, property or possessions to family and friends during your lifetime could be a useful way to reduce the value of your estate for IHT purposes. 

There are several ways you could do this.

You could make use of your annual exemption to give away up to £3,000 (2023/24). You can also carry forward any unused annual exemption to the following year, but this is only allowed once. 

You could potentially make gifts of unlimited value without your beneficiaries incurring any IHT. 

However, any gifts you make to family may be subject to the “seven-year rule”. This means that if you live for more than seven years after giving the gift, the recipients won’t have to pay IHT when you die. If you die before seven years have passed, IHT will be calculated on a sliding scale depending on the time between when you gave the gift and your death.

So, while gifting can be a useful way to reduce the IHT burden on your family, understanding how the rules might apply to your estate after you’ve gone may not be straightforward, so speaking to a financial planner could be helpful.

2. Support younger generations during the cost of living crisis

Many people are feeling under pressure financially due to the ongoing cost of living crisis. But, research reported by the Guardian suggests that the under-30s are among the hardest hit.

If you have excess funds beyond your retirement needs, gifting some of your children and grandchildren’s inheritance while you’re still alive could help them when they need it most.

For example, if you have a child who is starting university or buying their first home, the inheritance you have planned for them may be more helpful now than when they are more settled and secure later in life. 

3. Enjoy seeing your loved ones benefit from your wealth

One of the most rewarding benefits of passing on wealth during your lifetime is seeing your loved ones enjoying their inheritance.

Not only could this be uplifting and satisfying for you, but it may also strengthen your relationships with loved ones and provide opportunities for spending valuable time together.

For example, you might choose to help fund your grandchildren’s private education and so spend time with your children visiting potential schools and discussing plans for the future.

4. Retain some control over how your money is used

While it is possible to make certain stipulations about how and when your inheritance is spent via  your will and trusts, you’ll have greater control if you’re there to oversee it first-hand.

A living inheritance could allow you to take more of a supporting and guiding role in helping younger family members decide how to spend your wealth. 

By educating your children about money in this way, you could ensure that they make the most of the wealth you pass on. For example, by supporting them to choose and buy their first property.

Read more: 4 creative ways to help look out for your children or grandchildren’s futures

The importance of understanding your own needs

As the financial pressure on younger generations continues to rise, it’s not surprising that living inheritances are becoming more popular.

You may be eager to support younger family members during these difficult times, but it’s important to put yourself first.

A financial planner could help you to assess how much of your wealth you can truly afford to give away without compromising the retirement lifestyle you want. They can also breakdown the complexities of IHT rules and support you to create a plan for passing on your wealth in the most tax-efficient way.

Get in touch

If you’d like to learn more about setting up a living inheritance, please contact us by email at info@lloydosullivan.co.uk or call 020 8941 9779 to see how we can help you.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.