The Growth of Early Gifting of Inheritance

Our financial climate is changing significantly, including the way we approach inheritance. There is a rising trend among families to gift their inheritances earlier rather than later. According to Richard Bate, writing in Mondaq, this trend is shaped by various factors including the soaring cost of living, concerns about inheritance tax regulations, and the economic hurdles now facing younger generations.

The Emergence of Early Inheritance

The new tendency towards early inheritance gifting has become particularly noticeable amidst the cost of living crisis of 2023. Younger generations, facing an increasingly volatile economic climate, are finding early inheritance is a much-needed safety net.

Barclays’ recent research presents compelling statistics: around 75% of people aged 40 have received some form of inheritance from their parents, with this quite often going towards savings and investments, starting a business or home purchases. Data from the Institute for Fiscal Studies (IFS) shows us that the 25-34 age group most frequently receive these early gifts or loans, with parents being the generous benefactors in two-thirds of instances.

A Boost for Homeownership in Rising Costs

In the face of escalating property prices, the financial support from families has become an essential stepping stone for many to enter the housing market.

Research from Schroders shows the average UK house price is around nine times the average annual income. This stark difference highlights the growing affordability gap between generations. Though many still rely on their savings for the initial deposit, a recent survey revealed that 56% recognised the crucial role of family financial assistance in achieving their homeownership dreams.

Marriage Amid Economic Instability

Weddings are another area where these early inheritances are proving helpful. In 2022, the staggering average cost of a wedding in the UK was £18,400. One would need to bring substantial financial resources to the table to foot this bill. In most cases, newlyweds can rely on their parents with research from Wealthify showing that over 35% of UK parents plan to contribute to their children’s future weddings.

The Many Faces of Inheritance Gifts

While most commonly put towards major life events, early inheritance can also help with immediate needs. This includes savings and investments, non-cash gifts, living expenses, major family expenses, and buying a car or investing in education. Interestingly, receiving such gifts does not seem to correlate with negative life events like losing income or facing unemployment.

The Increasing Concerns About Inheritance Tax

The issue of inheritance tax has become a growing concern for many, resulting in over 60k searches for the term in the UK each month. It’s clear from HMRC figures that rising fines and tax receipts are making more individuals consider early inheritance gifts to safeguard their relatives against hefty tax bills.

The Double-Edged Sword of Early Inheritance Gifting

Despite the security it can provide, early inheritance gifting does come with its potential risks and complications.

The Upsides

By gifting assets before their death, individuals might keep their estate’s value below the UK’s IHT threshold of £325,000, thereby potentially avoiding inheritance tax. Moreover, early financial support can provide the younger generation a timely leg up in tricky financial environments, helping them to buy a house, further their education or even start a business. Received early, these inheritance gifts have the potential to grow if invested wisely.

The Downside

However, there are pitfalls to watch out for. Givers must ensure they maintain enough assets to manage potential future expenses, especially as care costs rise across the UK. There are complex tax implications, such as a potential Capital Gains Tax on gifted properties that are not their primary residence. Additionally, once the assets have been transferred, taking them back is legally complex and can lead to emotional distress.

Richard Bate, who is a Partner and Head of Private Wealth at Weightmans, advises that everyone, regardless of their financial circumstance, should seek professional advice on early inheritance gifting. It’s important to consider the why and how of the gifting process, and above all, to ensure the safety, security, and wisdom of the gifts you give.