As the inheritance tax (IHT) nil rate band is now frozen for at least 4 years it seems that people are considering gifting money to their children to avoid this tax and also help their children onto the property ladder.
These days credit is no longer easy to come by and lenders require large deposits and have much tighter lending criteria. Many first time buyers find it impossible to make that first step without help from Mum and Dad. However many Mums and Dads find themselves in the position where they are likely to pay large amounts of IHT and so passing it on to the children now rather than later seems a sensible approach.
However we urge you to carefully consider the following before giving the money away:
- Are you certain your assets continue to provide you with the income stream you require into your old age especially if inflation gets a grip in the later years?
- What happens if the children get married and then divorced (52% of marriages now end this way) – will half your gift walk away?
- What happens if your children get into a risky venture or are just spendthrifts and become bankrupt?
When dealing with this issue financial planning is essential, as you need to consider your actual expenditure over at least a 5 year period. This takes into account the costs of replacing cars, washing machines, house refurbishments and even the odd more expensive holiday. Projections on different levels of inflation and performance on your investments should also be taken into account as well as the size of your emergency fund if it all goes wrong.
Planning that should be looked into is the use of trusts to retain control of the money gifted by setting up loans to your children from a lifetime trust and also pre and post nuptial agreements. Providing these are set up, gifts may well be a sensible part of your long term strategy for helping your children.
We even have some clients who insist that some of the payments from their trusts to their children are used to fund their own annual financial planning meetings. The purpose being to ensure the children are making best use of their money as part of a sensible financial plan.
A sound financial education may be the best gift you can leave your children. It’s not much good giving them the money if they don’t keep it.