Take care when gifting money to family – 5 mistakes to avoid or risk losing EVERYTHING

Almost four in 10 have gifted money to their children, handing over £20,000 on average, according to AKG research co-sponsored by Canada Life. Yet one in six subsequently ran out of cash as a result. Here are five gifting and inheritance tax (IHT) pitfalls to avoid.

1. Gift too much money. Working out whether you have enough retirement income to share is tricky, said Shaun Moore, tax and financial planning expert at wealth manager Quilter. “You don’t want to be generous today only to run out of cash later.”

The average single person needs to generate a minimum retirement income of £10,900 a year, or £16,700 for couples, according to the UK Retirement Living Standards survey, so check whether your combined retirement savings will deliver that.

For a moderate living standard, singles need £20,800 and couples £30,600. To be comfortable, singles need income of £33,600 and couples £49,700. Can you gift money and still live the lifestyle you want? Only you can decide.

Remember, once you have gifted money it is hard to get back. Your final years could be a struggle if you are too generous.

2. Get hit by a care bill. An even bigger worry is that you will need nursing home care in later life, but lack the funds to pay for it. 

The average nursing home now charges £888 a week, or £46,176 a year, according to CareHome.co.uk.

BUPA calculates the average state in care is 801 days, which would give a typical total bill of £101,613. Would you have that to hand? If not, your local authority will use assets such as your home to cover the cost.

Given the cost and uncertainty of care, Moore said: “It is understandable that people may be reluctant to give money they need themselves one day.”  

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4. Watch it being frittered. If you fear your cash will be spent frivolously, consider gifting the money into a pension instead, Moore said. “That way the money will stay locked up until the beneficiary can access their pension.”

Most younger people have more immediate needs so you could consider options such as funding private school fees or saving for a specific goal such as a property deposit.

5. Get hit by an IHT bill.

Use gifting as an opportunity to reduce future inheritance tax (IHT) exposure, said Shaun Robson, head of wealth planning at Killik & Co. “You can gift up to £3,000 to one recipient free of IHT, plus separate gifts of up to £250 to any number of people.”

Regular gifts made from surplus income may escape IHT too, subject to certain tests. Larger gifts made more than seven years prior to death may escape IHT under the “potentially exempt transfer” rule. 

IHT is charged on a sliding scale, depending on when you made the gift. “The need to make IHT-free gifts becomes more pressing as you get older,” Robson said.