Low interest rates on savings, increasing student debt, higher living costs, house prices rising significantly faster than wages and a lack of affordable housing has meant that it is becoming harder for the younger generation to become financially independent. Today, younger people are turning to the older generation for help and according to a Legal & General report, parents have given £6.3 billion, high enough to rank ‘The Bank of Mum and Dad’ 10th largest if it was a mortgage lender.
Traditionally, parents tend to turn their attention to their children before providing support to grandchildren. “We’ve left everything equally to our children, and virtually nothing to the grandchildren. It’s up to the children themselves to deal with their children” is a phrase we often heard when starting the planning phase for a new client.
However there is now a growing desire to help grandchildren and see the benefits of gifts while you are still alive. You can support in many ways by helping with student living costs, getting them on the housing ladder, wedding costs or even contributing towards their pension pots.
One in four 20-34 year olds is living at home and this is due to increase to 33% by 2025 , mainly due to not being able to get on the housing ladder and not able to save if they choose to rent.
So how can parents and grandparents help the next generation to manage financially in their lives?
How can you help?
According to Legal & General, the average amount contributed by parents towards buying a home is £24,100, up £6,000 from last year. However it also found that a quarter of parents surveyed did not have confidence that they could afford all of their retirement plans. It is therefore imperative to ensure that you have enough financial resource in your estate to plan for day-to-day living costs and potential costs, such as long term care.
Managing the value of your estate with gifting
Firstly it is important to ensure that your own financial position is secure and well planned to last through retirement.
If your financial plans are secure and you have surplus income available to help your children or grandchildren, ‘gifting’ can be a fantastic way to help reduce the value of your estate and therefore minimise the Inheritance Tax (IHT) bill and regular gifts made from normal expenditure are exempt from IHT.
Making small gifts
If you wish to make small contributions, you can make gifts of up to £3,000 per year without paying any IHT. If you haven’t used last year’s allowance this can also be used, therefore potentially allowing a gift of up to £6,000. This can be useful to help with student living costs or pension contributions. You could also put this into their existing Individual Savings Account (ISA) or Junior ISA and if they have a Lifetime ISA the beneficiary would receive an additional 25% of the total savings up to £1,000 per year when the ISA is used towards buying their first home or for their retirement. It is also important that you keep a record of any gifts that you choose to make so that the Executors of your Will are able to evidence gifts if they are asked to meet any IHT assessments.
A wedding can offer an additional opportunity to provide a financial gift that is IHT exempt. You are able to gift an additional £5,000 to your child and £2,500 to your grandchild or great-grandchild.
Making larger gifts
If you wish to make gifts over the annual gift allowance, perhaps towards a house deposit, then your gift will be treated as a Potentially Exempt Transfer (PET). You can gift whatever amount you like, directly to your children or grandchildren. This is a great way to help reduce the value of your estate dramatically, whilst being able to see the joy that your gift provides. The gift will be fully exempt from IHT provided that:
– You survive for at least seven years from the date of the gift.
– The gift is made without reservation. This means that you cannot hold the beneficiary to any terms or receive any gain on the asset or contribution.
If you die within seven years then the amount of any gifts within those seven years will use up your Nil Rate Band (Currently £325,000). If the total gifts within the last seven years are more thank your Nil Rate Band, the excess will be chargeable to IHT. However, depending on the original dates of the gifts, the IHT payable is reduced on the sliding scale set out below.
Years since gift
% of IHT
Gifting can be a very complex financial advice area and we have covered only the very basics here. More information around gifting can be found on www.gov.uk/inheritance-tax/gifts but we strongly recommend that you speak with a financial adviser before making any gifts.
How can Origen help you?
If you are interested in finding out more on gifting, whether to assess your affordability to gift to the next generations or getting advice on the best way to manage your estate, then please get in contact. Our advisers are able to discuss your specific needs and circumstances and provide advice and all the options for you to best meet your financial goals as well as helping your children or grandchildren.