Passing on an inheritance while still alive is increasingly common, as parents and grandparents seek to see their wealth benefit loved ones and potentially reduce inheritance tax (IHT). An outright gift to another individual is generally treated as a potentially exempt transfer for IHT purposes, and if the donor survives for seven years after making the gift, it normally becomes exempt from IHT.
Benefits of Giving Early
Rakhee Wood, founder and independent financial adviser at Butterfly Financial Planning, said “there is a lot to be said for giving with warm hands rather than cold hands”, and many of his clients derive great pleasure from gifting during their lifetime. “That might mean helping children or grandchildren with a first home, childcare or starting a business, at a time when the money can make a real difference. And you get to see the benefit of it.”
Scott Gallacher, chartered financial planner at Rowley Turton, said receiving £50,000 at 60 is welcome, but at 30 or 35 it could be transformational. “It might provide a deposit for a first home, allow a family to extend rather than move, provide financial breathing space during maternity or paternity leave, or help someone start a business.”
Risks and Considerations
Gallacher added an important qualification. “Don’t give away money you may later need yourself. Your own financial security, including the possibility of living to 100 and needing soical care, has to come first.” Donors need enough to pay bills, cope with inflation and unexpected costs, and maintain a decent standard of living, but nobody knows how long they will live or whether they will need expensive care later.
Unequal gifts can cause family friction, so decisions need careful explanation. Consider whether the recipient is ready for the money, as giving a large sum to a financially inexperienced 18-year-old could backfire. Martin Rayner, financial adviser at Compton Financial Services, said a simple “bare trust” can be a handy option when helping younger people. “We often see this used for education or university costs. The catch is that the money belongs to the child and they can take control at 18, which can make grandparents wary of building up too large a sum.”
Planning and Future Rules
From 6 April 2027, most unused pension funds and pension death benefits will be brought within the deceased person’s estate for IHT purposes. Nouran Moustafa, an independent financial adviser at Roxton Wealth, said: “Tax should never be the only reason to make gifts.”
Keep proper records of substantial gifts, writing down what was given, to whom and when, to help executors if the donor dies within seven years. Consider whether the money should be an outright gift, a loan or held in trust, and be aware that trusts bring their own tax and legal rules. Also think about the impact of marriage and divorce, and whether a large gift could affect means-tested benefits, university funding, care assessments or the recipient's own tax position.
