An older man enjoying a coffee with his daughter

38% of parents have provided financial gifts. Can you afford to do it?

by helen hall on January 4, 2022

As a parent, you may want to help your children achieve financial security by providing a financial gift. Yet, you may also be worried about the effect it could have on your own lifestyle, as well as the inheritance you leave loved ones. Before gifting significant sums, it’s important to review your overall finances.

According to research from Canada Life, 38% of parents have already passed on “significant financial gifts” to the next generation. It’s something many more parents may be thinking about too.

There are plenty of reasons for providing a financial gift. Among those given were:

  • To help with general living expenses (21%)
  • To reduce the value of their estate (18%)
  • To act as a house deposit (17%)
  • To fund a car purchase (17%)
  • To support major purchases (17%)
  • To purchase a house outright (13%).

As living costs have increased, wages have been stagnant and so your children or grandchildren may struggle day-to-day or with reaching milestones. Getting on the property ladder is a well-known challenge that they may be facing, and gifts are frequently used to act as a deposit. Whatever your reasons for wanting to provide a gift, you should first assess the long-term effect it will have.

Here are five questions to answer before you gift some of your assets.

1. Do you expect the money to be repaid?

In some cases, you may want the sum to be repaid. If you do, make sure you’re clear from the outset to ensure you’re all on the same page. If you need it for a particular goal, such as retirement, a misunderstanding could affect your plans. It may also be a good idea to make the arrangement formal and contact a legal professional.

2. Will taking a lump sum out of your assets have a long-term effect?

It can be difficult to understand how taking a lump sum out of your assets can affect your long-term wealth. If you remove money from investments, for instance, it will also affect your expected investment returns. Taking some time to assess the effect it could have now means that you can lend financial support with confidence. Making gifts part of your financial plan can help you see how they could affect other priorities and goals. If you’re not sure whether a gift could harm other goals, please contact us.

3. Will you still have a financial buffer after providing a gift?

You may calculate that you have enough to live the lifestyle you want after giving a financial gift, but remember that the unexpected can happen. You should ensure you still have a financial buffer to provide a safety net if you need it.

4. Would gifting now affect how much inheritance loved ones receive?

Providing loved ones with a financial gift now may mean their inheritance is less than expected. In some cases, a gift now could provide greater financial security and makes sense. However, if leaving an inheritance is important to you, it may not be the right decision. It’s a good idea to talk to beneficiaries about how gifts will affect what you leave behind, as it could affect their own decisions.

5. Where will you take the gift from?

As well as deciding whether or not you can afford to give a gift, you should consider where the money will come from. An ISA, for example, is a tax-efficient way to save and invest, and you may not be able to replace the money you withdraw if it exceeds the ISA annual subscription. Withdrawing money from a pension could also affect long-term forecasts. If you’d like to discuss your assets and how you can make a gift, please contact us.

Are gifts an effective way to reduce the value of your estate?

While the research found many parents are gifting to support their children in reaching goals, 17% didn’t have a particular reason. Instead, the motivation was to reduce the value of their estate. If your estate could be liable for Inheritance Tax (IHT), gifting can be an effective way to reduce the bill. However, not all gifts will reduce the value of your estate immediately.

Gifts that are immediately outside of your estate include:

  • Up to £3,000 each tax year, known as your “annual exemption”
  • Small gifts of up to £250 for each person, each tax year
  • £1,000 gifts for wedding or civil partnerships. This rises to £2,500 for grandchildren and great-grandchildren, and £5,000 for a child
  • Regular gifts that help with another person’s living costs
  • Gifts made out of your normal income.

Other gifts may be “potentially exempt transfers” and could be considered part of your estate for up to seven years for IHT purposes. If reducing your IHT liability is a motivation for gifting, please contact us to discuss your options.

If you’re thinking about gifting, whatever the reason, taking some time to weigh up the consequences it could have on your lifestyle is crucial. Please contact us to go through your plans in the context of your other goals.

Please note: This blog 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 tax or estate planning.

helen hall38% of parents have provided financial gifts. Can you afford to do it?

Disclaimer: The information provided in our website blogs is accurate and up-to-date at the time of writing. However, please be aware that legislative changes and updates may occur after the publication date, which could potentially impact the accuracy of the information provided. We encourage readers to verify the current status of laws, regulations, and guidelines relevant to their specific circumstances. We do not assume any responsibility for inaccuracies or omissions that may arise due to changes in legislation or other factors beyond our control.

If you would like any clarification, or have any questions, please get in touch.

Sign up to our newsletter