Debt advisory specialists Henry Dannell have taken a look at the option of a living inheritance to help people pass on their money and assets while they’re still alive. An option that many could now be considering as they watch the younger generations of their family struggle with the rising cost of living.
What is living inheritance?
The tradition of people leaving their estate (money and assets) to family and loved ones upon their death dates back to Ancient Greece and to this day, the nuances of the practice vary greatly from one culture to another. In the UK, it is most common for inheritance to be passed on in a will upon a person’s death, but another lesser-known option is to opt for a living inheritance. This is the practice of passing-on an estate while still alive instead of bequeathing it in a will.
The biggest reason people opt for this path is to help their loved ones financially, for example, to buy a house or to pay for university, and many people like the idea of being around to see their hard-earned wealth going to good use.
Preparing to pass down a living inheritance
It’s vital that a person is sure that, after giving away part or all of their estate, they will still be able to financially support themselves for the remainder of their life. A good ‘rule of thumb’ is to give away what you definitely will not need but leaving enough to ensure a comfortable retirement.
Methods for giving a living inheritance
There are a number of different ways in which a person can give a living inheritance, whether that means using cash savings or extracting money currently locked in assets.
- Equity release
If a person is aged over 55, they can release the equity held in their home. In other words, they can extract some of the cash value their property holds without having to sell it or move out.
Gifting is a simple way of passing down a living inheritance, but there are limits to how much can be gifted before the money becomes subject to tax. For a general gift, £3,000 is the limit, but if the money is for a wedding, this can be extended to £5,000.
For larger sums of money, it is possible to gift without tax, but should the gifter die within seven years of giving the money away, the recipient will be required to pay tax on it retrospectively. The amount of tax depends on the length of time passed between the gift being given and the gifter dying. After seven years, however, there is no tax.
- A trust
A trust is a legal arrangement in which one party gives control of their money or assets to another, known as the trustee, under the promise that the money will only be used to the benefit of a named person or persons, aka the beneficiary. For example, grandparents might create a trust in which the assets are controlled by their children (the trustees) under the legal pledge that the money will only be spent in benefit on their grandchildren (the beneficiaries).
- Charitable and political donations
Living inheritance can be given to charities or political parties instead of family and loved ones. Inheritance donations to such organisations are tax-free.
How to be inheritance tax efficient
If you do decide to opt for the traditional route of an inheritance, there are many ways in which you can prepare your estate in order to reduce the inheritance tax bill and this can be done by combining a living inheritance.
Making a formal will is the only way of ensuring inheritance will go precisely to the desired people and places.
Tax is only payable on inheritance over the value of £325,000, unless you gift your home to your children or grandchildren at which point it can increase to £500,000. So if you find that the inheritance you are due to leave exceeds this threshold, then combining elements of living inheritance can allow you to avoid passing on a hefty tax bill.
As previously mentioned, any money that might exceed this threshold can be gifted tax-free in yearly sums of £3,000 or less. However, larger sums can also be gifted without inheritance tax providing that the gifter lives for another seven years.
Creating a trust and placing assets into it (a house, for example) can remove them from any personal inheritance and is, therefore, another way of keeping below the various tax thresholds.
Director of Henry Dannell, Geoff Garrett, commented: “It’s not uncommon for those enjoying their later years in life to opt for a living inheritance as it allows them to support loved ones here and now, while also removing a potentially hefty inheritance tax bill on their hard earned wealth.
This is becoming increasingly preferable for those looking to help their children or grandchildren with the high cost of climbing the property ladder and, more recently, the escalating cost of living.
In many cases, the advisable route is to opt for a mixed strategy based on both traditional and living inheritance as it allows you to financially support loved ones, maintain your own financial cushion and to ensure that what you leave and when is as tax efficient as possible.”