Deciding when to pass money down to your family is one of the trickiest calls in financial planning. Give too early, and you risk leaving yourself short later in life; give too late, and the gift may do nothing to reduce a looming inheritance tax bill.
This balancing act is about to become much harder.
From April next year, pensions will fall within the scope of inheritance tax, prompting many people to weigh up whether to start handing money to loved ones during their lifetime instead. But timing is everything, and according to Sarah Coles, head of personal finance at AJ Bell, there are seven life milestones that signal it might be the right moment to start:
- When retirement is within view
“Leaving yourself with enough money to last the rest of your life involves making a judgment call about how long you expect to be retired for. This is far easier once you’re close to retirement age. If you start too early and make assumptions about when you’ll finish work, you could end up with a shortfall if you’re forced to stop earlier than planned because of your health, caring responsibilities, or difficulty finding or keeping a job. Once you’re on the home straight, you can be far more confident.
- When you have enough income to last to the age of 90-95
“Some incomes last for life, including the state pension, final salary pensions and annuities. Other incomes will need to be modelled carefully, including income drawdown from pensions, to ensure you have enough money to last as long as you need it.
“Don’t just focus on income, there will also be outlays along the way that you need to set aside cash for. This includes everything from replacing your car to adapting your home as you get older. You also need to consider the cost of any care you’re likely to need. This isn’t an exact science, which is why it can help to take financial advice.
- When you’re confident you will have an inheritance tax bill
“Far more people worry about a potential IHT bill than ever face one, so calculate what your assets are worth, and what they’re likely to be worth when you die. Then consider the nil rate bands you and your spouse have available to you. You may be able to hold £1 million in assets and still have no tax to pay on death.
- When you can genuinely give it away
“People run into difficulties if they try to give things away on paper and still hang on to them in reality – especially their home. If you still get a benefit from it, such as not paying a market rent or missing rent payments, it will be taxed as belonging to you, so it’s best to wait until you’re actually able to part with things before making these gifts.
- When your beneficiaries are ready
“You need to be confident they’re in a position to make the most of anything you give them. If they are under the age of 18, one sensible option is to put money into a Junior ISA for them, because it counts as being given away immediately, but they won’t be able to access it until they’re 18. If you want to give money and stop them accessing it for longer, you may need to consider a trust.
- When you have a surplus of income
“If you have money left over each month after meeting your living expenses, you can take advantage of the rules around gifts from surplus income, which means you may be able to give money away regularly to the same person, for the same reason, and it falls out of your estate immediately for IHT purposes. This can crop up in your 50s and 60s, especially when the mortgage is paid, so don’t overlook the opportunity.
- Before you think you might have about seven years left
“The art of finding the right time means not leaving it too late. If you’re planning to give a large gift that will fall out of your estate for tax purposes after seven years, try not to leave yourself having to beat the odds to make it. It’s why any time from your 60s to your early 70s is a good opportunity to think about gifts.”