What should I consider before making gifts to my children?
This is a question that I am being asked to answer more and more and it is not a straightforward question to answer.
Can you afford to make the gift?
Don’t forget about yourself. We are all living longer and before making any substantial gift it is important that you have enough set aside to cover any eventualities that life may throw at you. Sit down and make a budget setting out all your annual expenses and your anticipated income, both now and in the future and also add a contingency and then ask can I really afford to make this gift?
Why are you making the gift?
Gifting to save inheritance tax (IHT)
Before making a gift with a view to saving IHT it is vital that you obtain professional advice. You need to be prepared that having made the gift you will not have the use of that asset anymore. This is very straightforward if you are gifting away ‘cash’ but when gifting property, perhaps an investment property or a holiday home, you must be satisfied that you cannot freely benefit from that property any longer. If you do, this will be classed as a gift with reservation of benefit and for IHT purposes you will still be treated as owning the property and the value of it will form part of your estate when you die. However, once the gift has been made and assuming that you do not reserve any benefit in it, the asset will ‘fall out’ of your estate for IHT purposes after seven years.
When making a gift to save IHT it is also important to consider how you are going to make the gift. Will it be an outright gift to a child? What if they become bankrupt or get divorced? What if they squander that asset? Are they old enough to hold such an asset? In these circumstances you may consider transferring the asset into trust. The advantage of using a trust rather than making an outright gift is that it is the trustees who control and own the asset and the trustees decide when the beneficiaries can utilise it. Importantly, you can be one of those trustees and therefore retain control. Trusts are often seen as being overly complicated but with the correct advice from an appropriate professional this need not be the case.
Gifting for capital protection
This is a very complex and controversial area and there are many organisations that advertise products that promise protection against care home fees, but the simple fact is that no one can make such a promise and you should be very careful when considering instructing an organisation who does. This is because the law states that if you deliberately deprive yourself of assets, which you would be by making a gift, with a view to avoiding the payment of care fees then that gift can be declared void and when a financial assessment is carried out the asset which you have gifted would still be considered yours.
That does not mean that there is not a place for making gifts, whether directly or in to trust, for the purposes of capital preservation but you need to be very clear on the reasons for doing this and your advisor should carefully discuss the options with you and the consequences of each of those options to enable you to make an informed decision.
Gifting assets, for whatever reason, is an important part of family and wealth planning and along with making wills and lasting powers of attorney should be considered early on and reviewed regularly. The involvement of a suitably qualified and experienced professional will greatly assist in ensuring that you select the most suitable option for yourself and your family.