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According to the latest report on wealth in Scotland, today’s young people are more reliant on inheritances, rather than earnings, to determine their living standards and wealth. This may prompt parents and grandparents to consider making a financial gift during their lifetime, rather than after.

Economic think tank, The Resolution Foundation’s report ‘The £1 trillion pie: how wealth is shared across Scotland’ shows that generational divides in household wealth have widened, with no group born since 1965 seeing higher wealth than their predecessors at the same age.

While millennials are predicted to inherit more than previous generations, the report suggests they will wait until they are at least 60 years old to receive the amount, long after they’ve had to shoulder expenses such as university costs, house purchases, and having children. So how can parents and grandparents, who have the means, look to provide support for younger generations now? 

There are various considerations that need to be taken into account before any financial gifts are made.  An important first step is to consider whether you are in a suitable financial position to make the gift.  If in any doubt, a financial adviser’s guidance should be sought.

The way in which funds are gifted then needs to be considered.  Will this be a gift of cash, or a specific asset?  Is it appropriate to make an outright gift to the intended recipient?

While an outright gift to a child or grandchild is usually simplest, if potential recipients are still too young to deal with funds themselves, it may be inappropriate.  In such cases, setting up a trust can be a good way to provide benefit to the next generation without allowing them complete access to the funds.  Trusts can also benefit a group of people, such as grandchildren, including any who may be born in the future.   

If an asset – such as a property – is being gifted, rather than cash, care will also need to be taken to ensure that Capital Gains Tax does not arise as a result.  Specialist advice should be taken in relation to this.

Making gifts – whether outright or through a trust – can also have an impact on the Inheritance Tax (IHT) position of the donor and trusts are subject to specific tax rules.  Generally speaking, if you make a gift, but die within the next seven years, the value of the gift is taken back into consideration for the purposes of charging IHT on death.  If substantial gifts are being made, this could even result in the recipient being asked to pay a 40 percent IHT charge that becomes due on the gift.  Steps can be taken to avoid such consequences, but these need to be considered at the time the gift is made.

There are exceptions to this ‘seven year’ rule.  For example, every person is able to gift £3,000 per year before the rule comes into effect.  In addition, small gifts of up to £250 per person per year can be given with no IHT consequences.

There is an additional exception for wedding gifts.  The amount you can give before the seven year rule applies depends on whether the recipient is your child, grandchild or a friend or other family member.

People can also make gifts of any size without IHT consequences if these are made from excess income and are made regularly (they cannot be ‘one-off’ gifts).  This can allow people to provide the recipient with regular support, although it should be noted that strict rules apply to this exception and careful records of income and expenditure need to be kept.

Bear in mind that your Will may need to be changed following a gift. For example, should the recipient benefit to the same extent after the gift has been made? 

While making inter-generational lifetime gifts will increasingly be key to both the older generation’s tax planning and the younger generation’s financial stability, the implications can be significant.  To avoid unexpected consequences, it is crucial that professional advice is sought. 

Kirsten Anderson
Associate, Private Client Team 

Chambers Leading Firm 2020 bw

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