Inheritance tax remains a controversial topic in the UK legislature, with the standard rate of this levy charged at 40% of any amount in excess of £325,000.
To this end, inheritance tax receipts to the UK Treasury amounted to around £5.32 billion through 2020/21, with this figure expected to increase for the financial year ending March 2022.
Because of this, you may want to consider giving your children and beneficiaries an early inheritance. But what are the precise pros and cons of this practice?
What are the Pros?
We’ll start with the potential pros and advantages of gifting an early inheritance, which include:
- #1. Give Your Children Money When They Need it: Given the rising cost of housing and living in the UK, your children may need capital to help them get on the property ladder or achieve similarly large financial objectives. With an early inheritance, you retain control over when money is released from your estate and can ensure that beneficiaries receive capital when they need it the most in most instances.
- #2. Avoid Court: If you wait until your death for your will to be executed and your estate to be distributed, you may run the risk of your decisions being contested in court. This can cause considerable acrimony and eat into your wealth in the form of legal costs, undermining even the best-laid examples of estate planning in the process.
- #3. Reduce Estate Taxes: Whenever your will is executed, your estate will have to pay out in the form of administration taxes. By gifting elements of your estate early and proactively, however, you can reduce this tax burden and maximise the amount of cash received by beneficiaries.
Addressing the Cons
Now it’s time to consider the potential cons and downsides of giving your children an early inheritance. Here are some considerations to keep in mind.
- #1. The Yields From Your Estate May Not be Used Wisely: While you may afford your children an early inheritance so that they can buy their first home, they may choose to spend this money elsewhere. This may be a source of frustration and family conflict, undermining many of the reasons for you to follow this course in the first place.
- #2. The Creation of Family Drama: On this subject, it’s fair to say that gifting an early inheritance may well create unrest and dispute within your family. After all, you may release money early to older children, leaving their younger siblings resentful that they haven’t been afforded any cash. What’s more, you’ll have to watch such conflict unfold as you continue to grow older, which is far from ideal in any circumstances.
- #3. You Can’t Account for Future Needs and Circumstances: Ultimately, gifting parts of your estate early will diminish its total value. This is challenging as you can’t account for the future needs and circumstances of beneficiaries, meaning that some individuals could go short at times when they’re most in need of capital from your estate.