Financial experts say there is much to be said for giving with 'warm hands' rather than 'cold hands' when it comes to inheritance, but warn parents must first ensure they have enough for their own future.
Deciding whether to give children their inheritance early is one of the most challenging and emotive decisions a parent can face, according to advisers. Mums and dads may want to help their offspring financially, but it is difficult to know how much future health and care costs might amount to.
Warm hands vs cold hands
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. The problem is many people do not know their numbers. They do not know how much they need for their own future so they hold on to everything just in case."
Ms Wood said "good" financial planning can provide clarity over what is needed, and knowing that means more confident decisions can be made about what can be given away.
Retirement and care costs first
Scott Gallacher, Chartered Financial Planner at Rowley Turton in Leicester, said people should not simply start giving their money away. He added any lifetime gifting should begin by making sure the donor has sufficient resources for their own retirement, longevity and potential care costs.
He said: "Inheritance tax planning often starts with the question, 'How can we reduce the tax bill?'. I think the better starting point is, 'How can this money do the most good?'. As we live longer, there is a real risk that substantial inheritances arrive too late."
Mr Gallacher said while receiving £50,000 at 60 is obviously welcome, for many people the same £50,000 at 30 or 35 could be transformational. He added: "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."
Intergenerational planning and tax changes
Martin Rayner, Financial Adviser at Compton Financial Services, said: "The problem with traditional inheritance planning is that the money often arrives when it is least needed. We typically see people passing on wealth in their 70s or 80s, meaning their children are already in their 50s and may be financially established. That is why planning should be genuinely intergenerational, including grandchildren."
Mr Rayner suggested a grandparent could fund a bare trust for a grandchild and, if they have little or no other income, that child could potentially receive up to £18,570 of savings tax-free each year, using their £12,570 Personal Allowance, £5,000 starting savings rate and £1,000 Personal Savings Allowance, plus a £3,000 Capital Gains Tax exemption.
He cautioned: "The important catch is that the money belongs to the child and they can take control at 18, which understandably may make grandparents wary of building up too large a sum."
Government reforms have also sharpened the focus on when to transfer wealth. Most unused pension funds and pension death benefits will fall within a deceased person's estate for inheritance tax purposes from April 6 next year.
Harvey Dhillon, Founder and Chief Exec at Zmartly, said the biggest risk in giving, however, is outside inheritance tax. He explained: "In England, if avoiding care charges was a significant reason for a gift, the council can charge as if the money were still yours, and there's no fixed time limit, so living for years after the gift doesn't make it safe."
Mr Dhillon said a key test is whether a need for care could reasonably have been foreseen when the gift was made. This suggests a parent who gives while he or she is fit and healthy is on much firmer ground.
The expert told Newspage: "Nobody knows how long they'll live or what care will cost, so a gift should only come from money you could never need to call on. On the tax side, if you stay on without paying a full rent in a home you've handed to a child, it stays in your estate however long you live."
