Is a living legacy right for you? Here’s what to think about

While wills were once the preferred method of passing wealth, more and more people are deciding on a “gifting while living” approach – so much so that Barclays predicts that a record £5.5 trillion could be transferred between generations over the next few decades.

Gifting during your lifetime, either in the form of a lump sum, or a regular income, could help you build a “living legacy”, rather than leaving wealth in your will to transfer to your beneficiaries after you pass away.

It’s not suitable for everyone though, so continue reading to discover some key points to consider beforehand.

There are several benefits of building a living legacy

Gifting while you’re still alive has several potential benefits for you and your family.

You could help your children or grandchildren achieve their financial goals

If you have loved ones who are at a formative age, there’s a good chance they have goals such as:

• Travelling the world
• Purchasing a home
• Having children.

While all these milestones are important rites of passage, they can also cost a lot of money. As such, you could gift your child or grandchild a lump sum they can put towards their aspirations.

This could be even more useful to them in their younger years rather than waiting until you pass away, which may not be until they are much older.

Providing your children and grandchildren with a financial foundation now could help them to establish future financial security.

You could reduce the size of your estate for Inheritance Tax purposes

Gifting while you’re still alive also comes with significant financial benefits, namely reducing the overall value of your estate for Inheritance Tax (IHT) purposes.

You can benefit from a “nil-rate band” of £325,000 (2023/24 tax year) meaning you can pass assets up to this amount to your beneficiaries before IHT is due.

What’s more, if you leave your main residence to your direct lineal descendant, such as a child or grandchild, you can also benefit from the additional “residence nil-rate band”, which is up to £175,000 (2023/24).

However, your beneficiaries will typically pay IHT at a rate of 40% on the portion of your estate that exceeds the nil-rate bands.

Provided that you carefully navigate the rules, gifting some of your wealth and reducing the overall size of your estate could lessen the IHT burden your family faces.

You can read more about the rules surrounding gifting later in this article.

You can witness the impact of your gift

If you leave your wealth to your loved ones in a will, you won’t be able to witness the joy your wealth brings.

Instead, a living legacy can allow you to see the impact your gift has on your loved ones’ lives with your own eyes. For example, you might be able to attend their house-warming party in their new home or see them thrive after you have helped them to cover essential living costs.

The emotional rewards of these special memories and opportunities for your loved ones are priceless.

There are also some important considerations involved with gifting while living

Aside from the benefits of a living legacy, it’s vital to remember that it isn’t suitable for everyone, and there are some important caveats to keep in mind.

You may end up giving away more than you can afford

Before you decide to gift any wealth to your loved ones, it’s important to ask yourself whether you can realistically afford it.

For instance, if you use cash savings or sell investments now to help a family member, you could miss out on invaluable interest or investment growth you’d rely on during retirement.

Additionally, it’s essential to consider any later-life care costs you may face as you grow older. These can be more expensive than you may initially think, as Which? reveals that the average cost of residential care homes rose by 19% from 2021/22 to 2022/23.

While it’s understandable that you want to help your family financially, it’s critical to ensure that a gift won’t derail your progress towards your long-term plans and create a shortfall later down the line.

It’s important to consider where the gift comes from

Aside from ensuring you can afford to gift in the first place, it’s also worth considering where the gift will come from.

For instance, if most of your wealth is tied up in your home, it won’t necessarily be giftable.

While you could go down the route of equity release – which involves extracting cash from your property without needing to move home – this has its own set of complicated benefits and downsides.

Similarly, it may be unwise to liquidate investments and give this value as cash gifts, as the potential growth of your invested wealth could help fund your dream lifestyle in retirement.

Rules can be complex, and gifts could still form part of your estate

As previously mentioned, the gifting rules can be complex, especially for IHT.

For example, you’re entitled to several allowances and exemptions that dictate how much you can tax-efficiently gift which, as of 2023/24, includes:

• The “annual exemption” of £3,000
• Unlimited “small gifts” of up to £250, so long as the recipient hasn’t received money from you under another exemption
• Wedding gifts with varying amounts, such as £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to anyone else
• Regular gifts from your surplus income to support a loved one’s living costs, provided that you can maintain your own standard of living.

As well as your allowances and exemptions, it’s also important to keep “potentially exempt transfers” (PETs) in mind.

This means that if you pass away within seven years of giving a gift that doesn’t fall under an allowance or exemption, it could still form part of your estate for IHT purposes.

If you pass away within three years of making a gift, it will typically be taxed at the normal IHT rate of 40%. Between three and seven years, the rate of IHT is measured on a sliding scale known as “taper relief”.

PETs could mean that gifting as early as possible is wise since you’re more likely to survive for seven years after sharing your wealth.

As you can see, the gifting rules can be somewhat complex. So, it can be useful to speak to a professional before you share any of your wealth with your loved ones.

Working with a financial planner could help you create a living legacy

If you’re still unsure whether building a living legacy and sharing your wealth with your loved ones is right for you, then speaking to a financial planner may be prudent.

We can help you to navigate the complexities of gifting while living, considering the tax implications as well as your personal income needs during retirement.

If you would like to discuss whether building a living legacy by sharing your wealth with loved ones is right for you, email us at info@harperlees.co.uk or call 01277 350560.  We’d be delighted to help.

Please note

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

Equity Release will reduce the value of your estate and can affect your eligibility for means-tested benefits.