Over-55s cash gift risk to beat Rishi’s tax trap
THE over-55s are increasingly leaving “pre-inheritances” by gifting money to loved ones while still alive, but risk having no money left to pay for care fees in later life.
Many are passing on their wealth early to beat Chancellor Rishi Sunak’s inheritance tax freeze and help younger family members with education or property costs, but they also need to be careful.
If they deplete all of their wealth too soon, they will not have enough money to pay for care and other forms of support.
In March, Sunak froze the inheritance tax (IHT) nil-rate threshold at £325,000 until at least 2026. It has now stayed at this level since 2009, steadily dragging more middle-income families into the net as house prices and stock markets rise.
Homeowners also benefit from a £175,000 main residence threshold if they pass their property onto close dependants.
The number of people paying IHT will more than double over the next five years as a result of Sunak’s freeze, according to the Office for Budget Responsibility (OBR).
By 2026, nearly 50,000 estates will be subject to inheritance tax, the OBR said.
Paul Barham, partner at advisory group Mazars, said the frozen IHT threshold is tax in disguise: “It disregards the pace of house price growth across large swathes of the country, which shows no sign of slowing down.”
He said this makes it important for people to plan how they pass on their wealth and consider options such as gifting. “This option is underused but can dampen the IHT shock.”
IHT receipts for April to September this year hit £3.1billion, which is £700,000 higher than a year earlier, and Kim Jarvis, tax and trusts consultant at insurer Vitality said: “This continues a consistent, long-term trend that could see IHT receipts exceed £6bn in the current financial year.”
Nearly half of over-55s think making family wait for their inheritance is wrong, as the average beneficiary is 47 years old, according to new research from equity release adviser Key.
They believe giving “preinheritances” is more useful when relatives are younger, as four in 10 under-40s have given up on buying homes unless their parents can help.
A pre-inheritance which contributes towards university fees, a first home or a dream wedding and make a huge difference, said Key chief executiveWill Hale.
Its research shows that the over-55s are keen to help children and grandchildren financially but also wary. “The biggest potential threat to pre-inheritance and in-life gifting is the fear of funding care in later life.”
This is a bigger worry than running out of money to support normal living expenses in retirement, he added.
Hale said talking to an independent financial adviser could help you work out how to leave gifts without impacting your financial stability: “Savings, investments or housing equity can all be potential sources of a pre-inheritance for your family.”