The Shift to Early Inheritance Gifting

Rising cost of living, concerns about inheritance tax and the challenges that the younger generations are facing, have led to more families gifting their inheritance sooner rather than later. Data reveals that 60,000 searches for “inheritance tax” occur each month in the UK, while an FOI request from HMRC reveals a 48% surge in families choosing to distribute their wealth before their passing over the past ten years. 

As we begin to see a shift in inheritance trends, Weightmans takes a deep dive into this phenomenon, exploring the rise in early inheritance gifting.

The Rise of Early Inheritance Gifting 

In 2023 many are grappling with a rising cost of living crisis, early inheritance gifting is acting as a much-needed cushion for the younger generation, in an otherwise tough economic climate.

Research by Barclays reveals that more than three in four 40-year-olds have already received some form of inheritance from their parents, with the majority putting this to use in savings and investments, setting up their own business, or buying their first property. According to data from IFS, those aged 25–34 are the age group most likely to receive a transfer, with around 1 in 10 receiving a gift and 1 in 25 receiving a loan over any two-year period. More than two-thirds of gifts are received from recipients’ parents, with a further 9% received from grandparents or great-grandparents.

This early financial boost can be instrumental in helping beneficiaries manage significant life events, such as buying a home or navigating the rising costs of day-to-day living.

Homeownership Amidst Rising Living Costs

With soaring prices, many find themselves without the necessary assets or financial footing to enter the market. Familial support, once a bonus, has become essential for many of this younger generation. With house prices escalating and the affordability gap widening, helping to buy a house is the most common scenario where financial support is given. 

Data from Schroders reveals that the average house price in the UK is now approximately nine times the average annual income. The rise in property prices over the past six decades brings into sharp focus the disparities between generations. While nearly half continue to rely on personal savings for the initial deposit, 56% of recent survey participants acknowledged the indispensable role of family financial support in achieving their homeownership aspirations.

Marriage in Economically Turbulent Times

Data from the IFS shows that 18% of soon-to-be-wed individuals receive inheritance gifts. In 2022, the average wedding in the UK cost a staggering £18,400, underscoring the substantial financial undertakings associated with marriage. 

According to research from Wealthify, over 35% of UK parents plan to contribute to their children's future weddings. Londoners are most likely to support their children's future ceremonies financially, with 1 in 17 parents saying they will spend between £40,000 to £50,000 and 1 in 13 planning to spend more than £50,000. This data demonstrates the traditional and cultural importance of supporting couples as they embark on their marital journey.

Other reported uses for Inheritance Gifts

Whilst most gifting is applied to these major life events, there is also an inclination to use financial gifts for tangible, immediate needs. These include savings or investments (15%), Non-cash gifts (15%), general living expenses (6%), paying off debts (5%), major family expenses (5%), purchasing a car or driving lessons (4%), going on holiday (2%) and Educational expenses (2%). 

Interestingly, in contrast, changes that correspond to negative, and perhaps less anticipated, events — such as separating from a partner, experiencing a fall in income or becoming unemployed — are not significantly associated with receiving an early inheritance gift from a family member. 

Inheritance Tax

The topic of inheritance tax has increasingly become a concern for many families, with over 60k searches for the term in the UK each month. According to HMRC figures, fines on families who break inheritance tax rules jumped by a third to £2.28 million last year and receipts from inheritance tax were £2.6 billion between April and July, up £200 million from the same period last year. These worrying stats are leading more individuals into early inheritance giving to ensure their relatives avoid heavy taxes.

Pros and Cons of Early Inheritance Gifting

Pros of Early Inheritance Gifting

Mitigating Inheritance Tax: The UK's IHT threshold stands at £325,000. Gifting assets early can reduce the value of an estate, potentially keeping it below this threshold. Moreover, gifts made more than seven years before a person’s death are typically exempt from IHT, providing a significant tax advantage.

Immediate Financial Support: With challenges like the UK housing market's escalating prices, younger generations can benefit greatly from early financial assistance. This can help them on to the property ladder, with further education, or even launch entrepreneurial ventures.

Potential for Asset Growth: The UK's investment landscape offers opportunities, from stocks to bonds. By receiving assets earlier, heirs can strategically grow their inheritance.

Cons of Early Inheritance Gifting

Financial Security risks for person making the gift: The rising costs of care in the UK mean the individual making a gift needs to ensure they retain enough assets to cover potential future expenses, especially in their elderly years.

Complex Tax Implications: While there are IHT advantages, other tax implications can arise. For instance, gifting a property that isn't a primary residence might incur a Capital Gains Tax on any increase in its value.

Irreversibility: Once assets are transferred, taking them back is legally complex and can be emotionally fraught. If a beneficiary faces legal issues, matrimonial issues or financial troubles, those assets might be compromised.

Richard Bate, Partner and Head of Private Wealth at Weightmans comments, "We are increasingly seeing that our clients are more attuned to the idea of making lifetime gifts due to the increasing prominence of Inheritance Tax and the cost of living in 2023. 

In general population terms, the baby boomer generation is reaching retirement age owning property and with a comfortable retirement income. They can see that their children and grandchildren are going to find it more difficult to attain the same level of financial security and want to help. 

If individuals are thinking about early inheritance gifting while they are alive, it’s important to take into consideration how and why you are gifting this inheritance. If you are gifting for tax reasons, be aware of the value of your estate, will gifting bring you under the UK's IHT threshold at £325,000? While there are IHT advantages, other tax implications can arise. For instance, gifting a property that isn't a primary residence might incur a Capital Gains Tax on any increase in its value. The gifts should be final, meaning you can’t take them back, to avoid any tax complications. Once assets are transferred, taking them back is legally complex and can be emotionally fraught. If a beneficiary faces legal or matrimonial issues or financial troubles, those assets might be compromised.

Therefore, it’s really important to talk to a professional and get advice on early inheritance gifting to ensure you’re keeping your finances safe and secure.”