Estate Planning / Inheritance Tax

Passing on an early inheritance

For many of those looking to get on the UK property ladder, soaring house prices mean the ‘bank of mum and dad’ becomes a necessary factor. Steve Wright, our Estates Director, looks at some of the reasons why property is driving early inheritance, and what to consider if you’re keen to support your children or grandchildren with a financial gift.

For many families, the concept of wealth has become more of a reality over the past few decades. Fuelled by home ownership, strong property prices and better pension savings, those in their 50s, 60s and 70s (the baby boomers) are more likely to be financially free than ever before. If you’re in this fortunate position then the idea of passing on some wealth, as part of an early inheritance, may be something you’re keen to consider.

Providing a financial boost

The time when an early inheritance is likely to be considered is most probably when your children or grandchildren start thinking about buying their own property. Looking at London offers a good example of how important a financial boost by way of an early inheritance can be. The cost of a first-time buyer property in the capital is now about nine times that of starting salaries. Recent reports show deposits of £125,000 are needed when starting out here – a figure which just isn’t achievable unless family money is a factor.

In the UK, the concept of home ownership certainly still prevails. But with deposits so high, particularly in London, it’s clear that when it comes to property ‘inheritocracy’ is the new reality – and in the capital two-thirds of purchases entail some sort of family backing.

Receiving an early inheritance

Unsurprisingly higher earners are the group most likely to receive a significant financial gift. The Institute for Fiscal Studies recently shared in a piece of new research that 41% of the leading 20% of earners received a gift in the past eight years compared to only 13% of the poorest 20%. It’s clear the adage ‘money goes where money is’ really does apply.

What to consider

If you are thinking about sharing your wealth during your lifetime, there are a few useful points to consider:

  • Inheritance Tax – passing down some of your Estate whilst you’re still alive can be a powerful solution, especially if Inheritance Tax (IHT) is likely to be an issue. IHT – charged at a flat rate of 40% – can eat away at a sizeable chunk of your Estate, and it’s no surprise that almost half of those recently surveyed by YouGov think IHT is unfair, with just 21% feeling it’s a reasonable payment.
  • The seven-year rule – any gift that you make – whether it’s for a house deposit or to help purchase a property outright – will be free from IHT as long as you survive the seven-year rule. There are a variety of allowances available including birthdays and weddings which sit outside of the seven-year rule.
  • Your own plans – ahead of sharing any of your wealth with younger generations, it’s worthwhile forecasting your own financial future. Will passing on an early inheritance leave you in a difficult position later on? For example, you may need to factor in care costs, or other retirement plans which you wouldn’t want to forfeit.

To discuss any aspect of your Estate planning, including sharing an early inheritance, please contact your nearest office.