Baby boomers want to pass on their wealth now, helping their loved ones improve their financial security. But many are worried about how gifting will impact on their own lifestyle and security.

Choosing to gift wealth away rather than leave an inheritance has clear benefits. First, you’ll be able to see the impact your generosity has on the lives of your loved ones. Secondly, an inheritance is likely to come too late for many beneficiaries. With younger generations struggling to step on the property ladder, pay off debt and juggle differing priorities, a financial gift earlier in life could have a far bigger impact on their long-term security.

It’s a step that’s appealing for many retirees. Research from Key found:

  • Three out of four over 55s already have or plan to help their children financially
  • One in five will financially support grandchildren
  • The average handout for children was almost £17,000 and £11,300 for grandchildren

Despite this, 78% also stated they were worried that by gifting financial support now they may run into trouble themselves later in life.

It’s easy to see why concerns may be present when gifting to loved ones. The unexpected can happen and it can be difficult to understand the impact of taking a lump sum out of your security over the short, medium and long term. This is where financial planning and cashflow modelling can prove invaluable.

If you’re among those that are planning to support loved ones financially, often your heart will say ‘yes’ but your head has some doubts. Understanding how providing a financial gift will affect your finances can give you the confidence needed to go ahead with your plans.

How does cashflow modelling help?

Cashflow modelling is a useful tool that lets you see how your finances will be affected. By inputting a range of data, from your income and investment values to projected interest rates, we’ll be able to show you how your wealth will change throughout retirement should nothing change.

It’s a step that can provide you with the confidence needed that your finances will continue to support you for the rest of your life. But that alone doesn’t help when you want to understand what impact changes will have. However, cashflow modelling also allows you to make changes to see how these will influence your finances.

So, if you’re planning to take £20,000 out of an Individual Savings Account (ISA) to help a grandchild purchase their first home, you’ll be able to see the day-to-day impact this will have on your finances. But more than that, you’ll be able to visualise whether it will have a long-lasting effect on your security. It can also help you see how taking the cash from other assets, such as a lump sum from your pension or investments, will provide a more effective way to pass on wealth.

If you’re among the 78% that are worried about how a monetary gift will affect your financial security, you can also change other factors when using cashflow modelling. For example:

  • Will you still be able to achieve your retirement aspirations after making the gift?
  • What assets will you have that could be used to provide an emergency fund if necessary?
  • Will giving financial support affect your ability to pay for potential care costs in the future?
  • Would you be left financially insecure if your partner passed away? How would your partner cope financially if the situation were reversed?
  • What impact will gifting have on the legacy you leave behind?

Financial planning and cashflow modelling should give you the confidence to make plans, including gifting to family members, safe in the knowledge that your long-term financial security has been considered.

The gifting rules

The Key research also revealed three quarters (76%) of baby boomers considering gifting wealth were also worried about the tax implications. Potential Inheritance Tax (IHT) is one of the areas to think about.

There are some gifts that fall immediately outside of your estate for IHT purposes. Exempted gifts include:

  • Up to £3,000 each year
  • Small gifts up to £250 per person each tax year
  • Wedding or civil ceremony gifts of £1,000, rising to £2,500 for grandchildren and £5,000 for children
  • Gifts that come out of your income; you must be able to maintain your standard of living after the gift is made
  • Payments to help with someone’s living costs, such as a child or elderly relative

With many parents and grandparents planning to gift significantly more, on average, than the exempted gifts, they may be liable for IHT. However, it’s important to note that only gifts given during the seven years before you die are included in your estate. The amount of tax due varies depending on how long ago the gift was received.

What’s more, many estates won’t be liable for any IHT at all. Once the Nil-Rate Band, and additional Residence Nil-Rate Band (if you’re passing your main home to children or grandchildren) are considered, many beneficiaries won’t have to pay IHT. If you’re worried about IHT, there are steps you can take to reduce the bill your loved ones will face.

If you’re considering making a gift to children or grandchildren now, there’s much to consider. Please contact us to understand how the decision could affect your financial security now and in the future. Our goal is to help you achieve your aims, including supporting family, with minimal worry through a tailored strategy.

Please Note: The Financial Conduct Authority does not regulate Inheritance Tax Planning.

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