By Ray Prince,
an Independent Financial Planner with Rutherford Wilkinson ltd.,
Newcastle Upon Tyne, U.K.

rayprince at dsl pipex com
http://www.medicaldentalfs.com/

We have all heard of surveys and reports about nearly or newly retired professionals stating with a smile on their face that they were going to 'spend the kids' inheritance'.

Many dreams were being fulfilled, involving travel to exotic far flung places, cruising, buying a boat or a Harley Davidson motorbike - or whatever appealed.

However, some latest research has revealed that many well off parents have decided that rather than simply knowing that the children will inherit when they die (if there is anything left!) they increasingly want to gift now.

Aviva, the insurance giant, have carried out a new survey on this subject. Results have shown that getting on for 50% of UK adults have been given a pre-inheritance gift from parents. This compared to a lower figure of just over a third who have been left money in their parents will when they have died.

They looked at which age groups benefited the most, and perhaps unsurprisingly the 18 to 25 group benefited most, followed by the 31 to 40 group. This is presumably because of the costs of university debt, getting on the housing ladder and then starting a family.

Of course, these financial gifts can make all the difference for their children, giving them a massive boost when otherwise they may well have struggled. As parents ourselves, this would be something that we would ideally like to do for our own children in the future.

A newspaper article that reported on this survey then queried whether having gifted money, there were any regrets, such as:

were the monies spent wisely by the children? what if the child were divorced, as that money is now 50% lost? what about inheritance tax if you die early? do some parents gift too early or too much leaving them exposed? All these are valid points, but let's look at the last two.

If you gift a lump sum to help your children, it is known as a Potentially Exempt Transfer (PET), and if you survive 7 years there will be no Inheritance tax (IHT). Also, if you do not survive this period but your total estate (including the gift) is worth less than £650k (for a couple) then again there would be no IHT.

In practice, however, the majority of our clients have estates worth over £1 million if not a lot more. This means that gifting lump sums can be a very effective way of reducing potential Inheritance tax.

But before we advise this as a valid route, we always carry out an in depth cash flow model exercise - financial map - that ensures that the clients themselves will always have enough funds for their lifetimes.

This is something that the article did not even mention, even though several financial advisers were quoted commenting on various aspects of the article, and shows once again how comprehensive financial planning is still little known!

Another popular route, used with a cash flow forecast, is the often overlooked "regular gifts out of normal expenditure" allowance.

As long as these are "regular and habitual", and do not affect the donor's standard of living, they are totally free from IHT. It also means that you can monitor how these monies are being utilised as you go.

A further option is to also purchase a second death life policy for, say, an expected period of 10-15 years, with the children as beneficiaries. This means that if both of you were to die prior to your gifting programme being complete, there would be a plan B to help pay the tax.

If you are considering gifting to your children, it makes sense to first work out your current liability to IHT. IHT is only payable if the value of your estate exceeds the nil rate band for that tax year.

£325,000 per individual was the level for 2009/2010, and this has been frozen at this level for 2010/2011.

So a couple will have a £650k allowance, and IHT is payable on the second death. So, an estate worth £1m would attract a bill of £140,000 for the children, as a tax rate of 40% applies above this level.

Of course, a lot of wealth can be tied up in the main residence, and to be able to gift, say monthly, you really need cash. This means that some clients downsize in their 60s or 70s to release funds.

Also, the normal allowances you can use are:

capital gifts of up to £3,000 per tax year per individual, and can be carried forward any number of small gifts up to £250 per year, can be given to any number of recipients £5,000 to a child, and £2,500 to a grandchild, as a wedding present. Therefore, if you are wondering if you could manage both now and later in life without all your assets, and want to reduce the value of your estate and help loved ones, make sure you take good advice.

Please note that our aim here is not to cover Inheritance Tax in detail.

The Financial Tips Bottom Line

If gifting is a route you feel you can take without jeopardising your own future security, then it is an option well worth investigating, as it reduces tax and therefore increases your family's wealth.

Perhaps most of all though, it helps your children when they need it most.

ACTION POINT

Before taking any firm action, take good financial advice from an adviser or planner you feel you can trust. It is also important that they use cash flow forecasts to be able to give best advice and charge fees (as there may well be no policy advice/sale).

Ask your adviser about this, or if you would like a totally separate and impartial opinion - feel free to contact us.

Published - May 2010