HOW TO BE GENEROUS

Investment & Wealth Advice




Top tips for successful financial gifting

Clare Munro, Senior Tax Advisor

Staying physically well has taken priority in recent weeks but, for many, the lockdown period has also adversely affected their financial health.  If a friend or family member is struggling on a reduced income, you may be wondering if and how you can help. 

Being generous is more complex than one might expect. It also raises questions about affordability, control and, not least, tax. So, where do you start?
 

Short term crisis

Firstly, consider whether this is a temporary financial emergency which will resolve once the post Covid-19 economy stabilises. Provided that you have sufficient funds for your own short-term needs, a bank transfer or two to meet your loved-one’s living costs for a couple of months may be enough.

Should the financial crisis prove to be more fundamental, this will require a bit more planning. Regardless of the present situation, maybe you would like to start thinking about estate planning and succession.

Put yourself first

If something longer term is required, you need to assess your own requirements.  You may know what resources you have right now, but it’s much more difficult to peer into the future.  A well-structured cash-flow modelling exercise can act as your financial crystal ball, showing you how your assets are likely to perform over several decades.  More importantly, it can identify what needs to be put aside to fund your living expenses and what you can afford to give.

Do you need control?

Not everyone feels comfortable making substantial sums available to an inexperienced son or daughter and, rather than an outright gift, you may want to retain an element of control or protection.  A gift into trust can provide a flexible solution. The aim would be to place the gifted funds or assets with nominated trustees to invest on behalf of the younger person. Those trustees can have power to make regular income distributions without handing the capital over to the beneficiary.  You might even want to be a trustee yourself.

Are you donating (unnecessarily) to the Exchequer?

Generosity can have inheritance tax (IHT) and capital gains tax (CGT) consequences too, although the recent drops in stock and property markets might help alleviate the charges.

An outright gift of cash will only ever be subject to IHT if you die within seven years of making the gift.  Even then, there are exemptions which could cover the gift and avoid an IHT problem should the worst happen.  The annual £3,000 inheritance tax allowance, for example, might deal with gifts to cover a short-term crisis, and this allowance doubles if you have not made gifts in the previous tax year. Another useful exemption covers regular gifts which you can make out of your income without affecting your lifestyle; such gifts are exempt from IHT immediately and are often used to help with regular costs like school fees. Cashflow modelling can help to identify your surplus income.

Gifts into trust may trigger an immediate lifetime inheritance tax charge at 20%, but only if the gift exceeds the £325,000 inheritance tax nil rate band.  As with outright gifts, if you die within seven years, the gift could incur an inheritance tax charge at 40%.

Use opportunities from fallen markets

Gifts of cash have no capital gains tax consequences, but if you make a gift of certain assets, such as a property or shares, you are treated as transferring the asset at market value and capital gains tax is charged accordingly.  Given that the property market has been frozen in lockdown, it’s not clear how values have been affected; if values fall, then the tax on a gift will be lower than it might have been six months ago.

Similarly, for inheritance tax, where the donor dies within seven years of a gift, the value charged is the value at the time of the gift, not the value at death, so a gift now fixes the value for estate purposes should the worst happen.  To put it another way, the asset’s growth in value is outside your estate.

One of the best things to emerge from the Covid-19 virus has been people’s willingness to help others, so if you’re inspired to offer financial help to loved-ones, it’s worth considering how your gift might have most impact.  The reductions in some asset values also provide an opportunity to look more widely at gifting and estate planning, by making the tax consequences more affordable.

Find out more

The key to unlocking the gifting conundrum, however, is ensuring that your own needs are adequately met, so if you’d like to take the first step towards an estate plan, please click this button to speak to a member of our Investment & Wealth Advice team.

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Important information

The information contained in this article does not constitute financial advice or a personal recommendation.  Past performance is not a guide to future performance. The value of an investment and its income can both increase and decrease and you may not get back the full amount originally invested. The value of overseas investments will be influenced by the rate of exchange.

Tax laws are subject to change and taxation will vary depending on individual circumstances.

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