The 5 best questions to ask before gifting money to loved ones

An older couple look at a tablet with their daughter

According to Legal & General, more than half of house purchases among under-35s are at least partly funded by gifts from parents.

This is no surprise as a combination of rising house prices and the cost of living crisis means that more parents are looking for ways to help their adult children.

But while it is natural to want to support your loved ones, it is important that you consider how it could affect your own financial plan.

Here are five key questions to ask before handing money over to loved ones.

1. Can I afford it?

Before deciding to gift any money, you may need to ask yourself whether you can realistically afford it. And just because you have the money in a savings account, that doesn’t necessarily mean you can afford to part with it.

While you may want to consider how it will affect your short-term finances, it is perhaps more important to think about how it could affect your long-term goals.

For example, if you use investments or cash savings to help a family member, you could miss out on valuable interest and growth that you later rely on in retirement.

So, although you may want to help your family during these uncertain times, make sure that it does not disrupt your financial plan and create a shortfall in your retirement income.

This is where cashflow planning can be incredibly valuable. We can create a forecast and give you a better understanding of the long-term effects of making this gift, so you can make an informed decision.

2. Should I gift or loan the money?

The next question to answer when giving money is whether you want the recipient to pay you back.

In some cases, a loan could be a better option if you have funds that you do not need right away, but you cannot afford to gift permanently. For example, you may offer some of your savings, provided the recipient repays the loan before you retire.

Additionally, you may prefer a loan rather than a gift because you want to instil a good attitude towards money, especially if you are helping your children. By requiring them to repay the loan, you can support them while also teaching them to be personally responsible and pay their debts.

Just bear in mind that loaning the money does come with some risk if the recipient is unable to repay it.

3. What tax will I pay?

Gifting can be an effective and tax-efficient way to help loved ones, provided you understand the tax implications and plan accordingly.

You have an Inheritance Tax (IHT) annual exemption of £3,000 in the 2023/2024 tax year. This means you can make one or several gifts, up to a total of £3,000, and they will fall outside of your estate for IHT purposes. You can also make unlimited small gifts to other people of up to £250.

Additionally, you can carry over any unused annual exemption to the following year and potentially increase the value of tax-efficient gifts you can make.

If you gift more than your annual exemption, you must usually survive for seven years after giving the gift before it falls outside of your estate. If you die before this, your family may have to pay IHT on some or all of the gift.

You can also gift an additional £5,000 outside of your estate – or £2,500 if you are a grandparent – towards a child’s wedding or civil partnership ceremony.

As well as IHT, you may need to consider Capital Gains Tax (CGT) if you are gifting property or shares, for example.

If you are unsure about the tax implications of a gift, you may want to seek advice first so you can ensure that your strategy is as tax-efficient as possible.

4. How can I protect the gift?

You are likely considering a gift or loan so you can support loved ones, which is why you may want to think about ways to protect that wealth and ensure that it remains in the family.

Unfortunately, in some situations, that money could be at risk if you pass it to a family member. For example, if your child or grandchild separates from their partner, their ex may have the right to claim a portion of it. Additionally, they may have to pay the money to creditors if they have large debts.

Fortunately, there are ways to protect your wealth, provided you consider this at the point of gifting. If you are giving money to put towards a property, for example, a deed of trust may stop an ex-spouse from later claiming it in a divorce.

Discussing the gift with the recipient and setting clear expectations about what the money is to be used for can also be beneficial, especially if you are concerned about their debts.

That said, you will likely relinquish some control over your wealth when you gift or loan it to loved ones.

5. How will it benefit the recipient?

Finally, you may want to consider how the gift will change the recipient’s financial situation and whether it will truly benefit them.

If they need money for a specific expense like a property, wedding or civil partnership, or to pay off debts, then the situation is simpler. A cash gift will likely benefit them because it helps them achieve these short-term goals.

However, if they are generally struggling to cover expenses or spending money recklessly, a lump sum won’t necessarily improve things for them.

In this case, you could consider alternative ways to support them like contributing to their pension or making a smaller, regular gift to help with living costs, for example. This may also have tax benefits for you under the IHT “gifting from income” rules.

This could help your loved ones to continue their progress towards their long-term financial goals, even though they face financial difficulties in the short term.

Get in touch

In these uncertain times, you will likely want to support your family. We can give you the advice you need to help loved ones without disrupting your own long-term financial security.

Email or call us on 01189 876655 for more information.

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning, cashflow planning, tax planning or will writing.