To gift or not to gift - that really is the question to ask!

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The budget back in October 2024 certainly brought with it some significant changes, not least to pensions and the future inheritance tax position of them.

From 6 April 2027, the value of a pension will be considered within an individual’s estate for inheritance tax calculations, and where this pushes someone over the nil rate band, a tax charge equal to 40% of any excess will be due. For married couples, this will only be the case on the second person’s death, as pensions can pass across to a spouse free of inheritance tax.

This has started many people thinking about whether it will be advantageous to gift money to their loved ones during their lifetime, rather than waiting until their death to pass on money from their pensions and other assets.

This is a valuable question to ask, and one that our Financial Planners will be answering for many clients at their upcoming annual review meetings. So, what should you be giving consideration to, when it comes to gifting money? Here are our suggestions:

Affordability

This might sound obvious, but it’s the most crucial first question to ask. Can I afford to gift my loved ones money?

Your Harding Financial Planner can help you establish the affordability of making gifts by using our state of the art Lifetime Planning Software. We can run various scenarios to establish how secure your own financial plan is by simulating a variety of market events, the potential future cost of care, rising inflation and so on. Once we’ve ‘stressed tested’ your own position, we can then look at how that’s affected by giving money away, putting you in a clearly informed place for decision making.

Need for access in the future

If you’ve checked affordability and you’ve received the good news that you can afford to give away some of your assets to loved ones, what next?

There are multiple ways of giving money away and getting it out of your estate, to reduce the inheritance tax bill that your beneficiaries will pay. To help you decide the right route for you, it’s important to ask yourself whether you’d like to be able to access some or all of this money in the future, should your financial position substantially change. Or perhaps you would like the option of altering exactly who will benefit from the money you want to gift?

For example, if you definitely don’t want access to this sum of money and are absolutely certain as to who you’d like to give it to, then an outright gift of capital might be a good solution. However, if you wish to retain access to the full amount and potentially alter the person who benefits from the money in the future, then you may look at Business Relief qualifying investments, or various trusts that allow you to access the money you put in them.

Your age and health position

Whenever you make a gift of capital above the annual gift allowance of £3,000, a seven year clock starts. When this seven year period ends, the capital sum is considered fully outside of your estate for inheritance tax calculations. So, if you are considering making a gift to either a person or a trust, and are elderly or in a poor state of health, then there may be other, more preferable routes to reduce your inheritance tax liability.

For example, certain investments such as Business Relief qualifying investments or Alternative Investment Market (AIM) holdings can reduce your inheritance tax liability after just two years, instead of seven. They do, however, carry more risk from an investment perspective, which might mean they’re not appropriate.

Your loved ones’ situations

Whilst considering making a gift of capital to your loved ones, it’s advisable to consider their personal situation, too. Are they in a struggling marriage? Might a divorce be on the horizon? Are they in difficulty, financially? Is there the possibility of bankruptcy? Do they have significant wealth in their own right? Do they have their own inheritance tax liability, already?

If the answer to any of these questions is yes, then it might be better to consider other options, such as gifting the money into a trust, where these loved ones can be discretionary beneficiaries. This keeps the money out of their own personal estates, but gives you (and your other chosen trustees) the ability to gift them money from the trust in the future, should you desire.

If it is still appropriate to directly gift a sum of money to your loved ones, then why not suggest they seek some advice on how to maximise the benefit of this gift to them? For example, are they employed and able to get some great tax relief savings by using the gift to fund their pension contribution allowances?!

In summary, it’s important to seriously consider the impact of making a gift. Where you’re making an outright gift to a person, it’s an irrevocable decision, and one that if not planned for carefully, might leave you financially struggling in the future. We’re here to help you feel informed, empowered and confident in the financial decisions you make, so if you’d like to talk to us about anything we’ve raised in this article, please do get in touch.

This article has been based on our understanding of the new rules as we understand them at the time of publishing and could be subject to change.

This article should not be taken as advice.