Is now a good time to make a financial gift?

Is now a good time to make a financial gift?

Charlotte Andrew
Published: 12 May 2020 Updated: 13 Jun 2022

Helping a loved one financially has recently become more of a priority for many people. While the economic landscape is constantly changing against the backdrop of Covid-19, it’s important to think about what options and potential opportunities are available to both the donor and the recipient.

If a loved one has lost their income as a result of the coronavirus pandemic, you might be thinking about what you can do to help them during this period. For example, if your children were previously in secure jobs or had a steady self-employed income, you probably wouldn’t have needed to help them financially, but they might currently need your assistance more than ever. Now is definitely the time to reassess your estate planning strategy and think about how you might want to make a financial gift.

Where do I start?

Before making any sort of commitment to helping someone else, it’s vital you check that you can afford to do so without it making an impact on your own standard of living. Once you’ve established how much the recipient needs, cashflow modelling will show if you have any excess income or capital after expenditure. You’ll then be able to see how much you can comfortably give away both now and going forward.

How do I make a gift?

Two of the main ways you can make a financial gift are:

  • By giving the money away outright
  • By placing the money into a trust

The main draw of making an outright gift is simplicity, but there are also benefits to gifting into a trust. Placing the money into a discretionary trust can protect the assets from being eaten up by legal proceedings, such as bankruptcy or divorce.

You might also want to help out more than one person and a trust will allow you to provide for a number of beneficiaries. During these changing times, the financial needs of each recipient might be unclear and a trust will allow for this. In effect, it could be set up as a type of ‘emergency fund’ which the recipients can benefit from if and when they need it.

What about tax?

The two main taxes that need to be considered when making a financial gift are:

  • Capital Gains Tax which is payable when transferring assets (for example, a house or an investment) that have increased in value. Capital Gains Tax is payable by the donor

  • Inheritance Tax which is usually charged at 40% on anything above your nil rate band if you do not survive for seven years after making the gift. If gifting the money into a trust, there is also the potential to trigger a 20% Inheritance Tax ‘initial charge’

Under the current legislation, if you do not gift the assets during your lifetime, they will not be subject to Capital Gains Tax on death, but they will be liable to Inheritance Tax. Gifting these assets seven years prior to death would eliminate any Inheritance Tax charge, but Capital Gains Tax would be payable. Neither option is particularly appealing. As the Capital Gains Tax of 20% is likely to be lower than Inheritance Tax of 40%, gifting the money now seems sensible, but it can be a deterrent for many people.

Should I still make a gift?

Despite donors still being liable for Capital Gains Tax if assets are gifted outright prior to death, this global pandemic has provided a rare opportunity to reduce the bill. We are currently in the midst of a slump in the economy which has significantly reduced the value of investments and as such, the gain on the original investment. This means that the Capital Gains Tax payable is likely to be substantially lower than it was a few months ago.

Any outright gifts are classed as a Potentially Exempt Transfer and Capital Gains Tax is based on their value on the date that they were gifted. Even if they eventually return to their previous value, the Capital Gains Tax bill would still be based on the lower figure. So long as the donor survives for seven years after making the gift, no Inheritance Tax would be payable and the Capital Gains Tax liability would be much smaller than it was previously.

If you are looking to fund a trust, the reduced value of investments can help here too. If the value of the gift exceeds the nil rate band over any seven year period, the excess is subject to Inheritance Tax of 20%. The lower value of the investments means that more money can be placed into the trust today than six months ago.

How Tilney can help

This scenario is unprecedented and changing at a rapid pace. Deciding on the most effective way to give a financial gift is complicated at any given time, let alone during this period of uncertainty.

That’s where we can help. Our team of expert financial planners are at the end of the phone if you have any questions about the best way to make a financial gift.

You can call us on 020 7189 2400 or book an appointment for a free initial telephone consultation.


This article was previously published on Tilney prior to the launch of Evelyn Partners.