The Art of Giving

Navigating the World of Financial Gifts

In today’s world, financial gifts are becoming an increasingly popular way to support loved ones. This approach goes beyond simply offering a helping hand – it can be a powerful tool for tax planning, fostering deeper connections within families, and leaving a lasting legacy.  

Benefits of Giving Financial Gifts

Financial gifts are evolving beyond a simple act of generosity. Let’s explore the multifaceted benefits of giving financial gifts during your lifetime.


Tax Efficiency with Proactive Planning

Gifting strategically can be a brilliant tax planning move. By thoughtfully distributing your wealth throughout your life, you have the potential to significantly reduce your Inheritance Tax (IHT) liability. This approach allows you to manage your financial legacy while minimising the tax burden on your loved ones when you’re gone.


Immediate Impact that Makes a Difference

Unlike bequests outlined in a will, financial gifts have an immediate and tangible effect on the lives of your loved ones. They can act as a springboard, helping them achieve milestones such as purchasing a home, pursuing higher education, or simply weathering unexpected financial challenges. These timely gifts can make a significant difference in their present circumstances, shaping their future trajectory.


The Joy of Witnessing Growth and Building Stronger Bonds

There’s an immeasurable joy that comes from witnessing your loved ones flourish thanks to your generosity. Financial gifts can strengthen family bonds by demonstrating your unwavering care and support. Knowing that your gifts have a positive impact on their lives creates a lasting sense of fulfilment and deepens your connection with them.

The trend of financial gifts during one’s lifetime is undeniable. While traditionally wealth was passed down after death, an increasing number of people are choosing to share their financial resources with family members while they’re still alive. A study shows that a staggering six out of ten parents and grandparents are planning to gift money to their families even before their own passing. These early inheritances, averaging around £9,500 per child or grandchild, serve various purposes [1]. They can be used to celebrate special occasions, bridge the gap for educational expenses or everyday needs, and most significantly, to assist recipients in achieving homeownership.  In fact, this practice has become so prevalent that the metaphorical “Bank of Mum and Dad” has risen to become one of the UK’s largest mortgage lenders, highlighting the significant real-world impact such gifts can have[2].


Implications of Financial Gifts


Tax Considerations

Understanding the tax implications is crucial when it comes to financial gifting. While gifting can be a strategic way to mitigate Inheritance Tax (IHT), navigating the rules carefully is essential. Key points to consider include the annual tax-free gift allowance, which currently stands at £3,000 per year. Gifts within this limit are generally exempt from IHT. However, caution is advised with larger gifts or those made within seven years of your passing, as such gifts may still be subject to tax. This awareness can help ensure that your generosity aligns with your overall tax planning strategy, allowing you to support your loved ones efficiently and effectively.


Recording and Documentation

Properly documenting your gifts, especially if they are part of a series, is essential for several reasons. Maintaining detailed records ensures that these gifts are excluded from your estate for tax purposes, playing a crucial role in your overall tax planning strategy. Additionally, recording gifts provides transparency for your beneficiaries, which can be particularly valuable in fostering understanding and reducing potential disputes among them. This practice also aids your executors during probate proceedings, making the process smoother by clearly delineating what assets are part of the estate and what has been gifted away. In essence, the act of documenting your financial gifts not only helps in the practical aspects of estate management but also supports the emotional well-being of those you leave behind.

Balancing Your Own Needs

While supporting loved ones through financial gifts is indeed admirable, it’s crucial to strike a balance that ensures your own lifestyle and financial security remain intact. One effective way to achieve this balance is by gifting from surplus income rather than capital, which allows you to help others without compromising your own well-being. Additionally, looking ahead and planning for future expenditures, including potential long-term care costs, is vital. Cash flow planning plays a key role in this process, as it helps you make informed decisions about both the amount and timing of your gifts, ensuring that you can support your loved ones while also securing your financial future.

Strategies for Tax-Efficient Financial Gifts

Understanding the nuances of tax efficiency is crucial when it comes to giving financial gifts. One strategy involves regularly gifting from your surplus income, which can be a tax-efficient approach. However, it’s essential to ensure that these gifts do not compromise your lifestyle and financial well-being. Keeping meticulous records is also vital to establish a consistent pattern of gifting, which can further support your tax position. Another option to consider is investing in Junior Individual Savings Accounts (ISAs) for beneficiaries, which offer tax-free growth up to a £9,000 annual contribution limit and are relatively easy to set up. Alternatively, Bare Trusts could be explored for their wider investment options and potential for higher returns, although they come with tax implications and potential legal fees, and provide control over when and how the assets are used by the beneficiaries. Additionally, leveraging the annual gift allowance of £3,000 per year can further enhance tax efficiency. This allowance can be given to one person or split among several recipients, and any unused portion of this allowance can be carried forward for one additional tax year, offering a strategic way to reduce potential inheritance tax liabilities.

The rise of financial gifting reflects a shift towards empowering loved ones and fostering closer family ties. It’s a powerful tool that can achieve multiple goals: reducing your tax burden, supporting your family’s dreams, and leaving a lasting impact.

However, navigating the intricacies of financial gifting requires careful planning.  To ensure your generosity delivers the intended results, consider seeking guidance from a qualified financial adviser. We’re here to help you understand the tax implications and to help create a gifting strategy that aligns with your financial goals and family’s needs.


[1] Money Expert – Gifting Money to Children and Grandchildren Explained – 2023

[2] – Business Matters – The implications of the bank of Mum & Dad