Early inheritance

£3.4bn was collected through inheritance tax (IHT) in 2013/14. This has risen by over 25 per cent in the past four years, but it is important to remember that the tax collected reflects the value of assets, especially house prices.

Therefore the £2.8bn collected in 2008/9 was significantly less than the £3.8bn collected the previous year in 2007/08, when house prices were at a high and before the recession. The introduction of the transferable nil rate band in October 2007, also contributed
to this reduction.

Clients are often concerned about the impact of IHT although currently, only about four per cent of estates actually pay the tax. A global survey carried out for HSBC recently found that the traditional way of passing
an inheritance on death, might be
dying out.

The survey reported that over 50 per cent of retired people in the UK regularly make provision for a close relative, with some 19 per cent giving support to adult children. The report published before the changes to the pension rules came into effect. It is possible that the increased flexibility will lead to more gifting being made before death.

Many grandparents contribute towards the cost of school fees. Some do this out of excess income, whereas others make capital gifts. As property prices have increased, many children
are reliant on their parents to enable them to make the first step onto the property ladder.

Increasingly, parents want to see their children benefit from having money earlier, rather than having to struggle to pay a mortgage, or go without in order to pay for school fees.

There may be other factors at play. Clients are not only worried about having to pay IHT; many are concerned about the cost of long-term care. It may be that by making gifts sooner, they see this as a way of ensuring an inheritance for their children, whatever their own needs may be in later life.

Great care needs to be taken if gifting is done with this in mind, but the reality is that currently, about 500,000 elderly people are in residential or nursing homes. This is significantly more than the 35,000 estates that are estimated to be liable for IHT this year.

Whatever the reasons, clients need to consider various factors before committing to lifetime gifting.

Spend their inheritance

Many see this as the best form of inheritance tax planning. If you have worked hard for the money that you have saved, then you should have the benefit of it.

Look after yourself first

You don't know what your own needs may be in later life. With your own savings, you can have more choice in terms of care. Many grandparents fund their grandchildren's school fees, often because their children have large mortgages to pay, but is it their responsibility to fund their grandchildren's education?
The average private school fees are around £12,000 per year, so this may well be an expensive commitment for each grandchild.

Reservation of benefit

If you are going to make lifetime gifts, you need to accept that you will not get the money back. For the gift to be effective, it must be made without conditions. If you retain any right to the gift, it won't be effective and will still form part of your estate on your death for IHT purposes.

The classic situation is a gift of the family home. If you transfer ownership but continue to live in the property and do not pay a market rent to the new owner, then the property will still be included in your estate for IHT purposes.

Death, debt and divorce

What if your child dies before you, or gets into financial difficulties or, divorced? The gift that you have made may well pass to people that you would not have chosen to benefit. Just as you can have no right to claim the money back, you also have no right to say what happens once the gift has been made.

Lifetime gifting does mean that you can see the benefit of the gift to the recipient. Many people would prefer to pass assets over sooner rather than have their children struggle. However it is important that you consider your own needs and circumstances first.

Jacqueline Almond is a partner at IBB solicitors