"Don't give your kids too much money before you die," warns top adviser

Published by Charles Calkin on 27 June 2017.
Last updated on 27 June 2017

Don’t give away too much money…

Tempted to pass on assets to your children to dodge care costs and inheritance tax? Find out why one top financial planner is warning you to err on the side of caution.

We know that the state will ask us to pay more for the care we may need in later life. Given the record of backtracking, we may find the inheritance tax (IHT) rules end up changing in the coming years. Some people, anxious not to erode an inheritance they have long wanted to pass to their children, will be tempted to start passing money on early. But I think you give your money away at your peril.

The best gift you can give your children is not to be a burden to them towards the end of your life when their resources may be stretched and meeting your needs could require enormous sacrifice.

I am a financial planner and I have a number of clients in the ‘sandwich generation’, who are trying to help their children on to the housing ladder and at the same time supporting elderly parents in care.

Cost of care

We want to be in our homes as long as possible and most of us will need some support for that. If we need to move into a residential care home, it might cost £5,000 a month. Typically, that might be for four years on average, unless the problem is dementia – when it could be longer.

Medical advances mean more of us are surviving illnesses that would have once killed us, so we are living long enough to suffer from the cruelty of dementia. You can survive it for many years. The costs of the specialist care this requires can add significantly to the bills. I have a client with dementia who is paying £10,000 a month to be looked after in a care home in south-west London.

It makes it very difficult to know how much financial provision you might need in later life.

What can you do if you want to pass on an inheritance?

First, what you can’t do – you can’t give the money away with strings attached. To avoid IHT – and quite possibly falling foul of any new regulations around care funding that might be introduced – any gift must be “without reservation”.

You might think you can give money to your children without any formal agreement and that they will look after you anyway, but that may not be possible. They may need the money to pay for a home, in which case the cash is likely to be locked in bricks and mortar, and not available for you. In the event of a divorce – unless you have put in pre- or post-nuptial agreements – you may see half the gift disappearing with an ex-husband or former wife.

Trusts can be a helpful way of ensuring the right person gets to receive the money – and keep it – but they need to be drawn up carefully, so you need to use an experienced solicitor. There is a risk that if you are considered to have divested yourself of money to avoid care costs that the arrangement will be challenged.

If you are a couple and are determined to leave money to your children, consider taking out a life insurance policy that only pays out on the second death and is written in trust for the children. This should be outside your estate for IHT purposes and is also helpful in avoiding probate delay.

If you want to give money during your lifetime, the most common way is by lump sum through a potentially exempt transfer (PET). For major gifts to be exempt from IHT, you have to survive seven years after making the gift. If you die before that time, a taper potentially applies – so if you die within three years, the recipients may have to pay the full 40% IHT back. Between three and four years it would be 32%, and so on down to 8% if you die six to seven years after making the gift.

This is a clean way to gift substantial sums, but it can encourage many people to give away too much too soon.

Passing money on gradually

There is another way to give without having to think seven or more years ahead. An underused facility is “gifts out of normal expenditure”. Document how much of your annual income you spend year to year. You can give the surplus away without the PET rules applying as long as you are able to maintain your usual standard of living. So as you tick off another healthy year, you might feel able to pass on another chunk. The key is accurately recording the information. Normal gifts such as Christmas and birthday presents are included within this allowance too.

In addition to gifts out of normal expenditure, each individual has an “annual exemption” of £3,000 (therefore £6,000 for a couple) worth of gifts they can make each tax year without these gifts being added to the value of an estate. This can be carried back one year if you haven’t fully used the previous year’s exemption.

It is also possible to give away wedding gifts of up to £1,000 per person, or a greater £2,500 for a grandchild or great-grandchild and £5,000 for a child.

Also exempt from IHT are payments to help with another person’s living costs, such as an elderly relative or a child under 18.

Finally, it is possible to give any amount of gifts of up to £250 per person during a tax year as long as another exemption has not already been used on the recipient.

When the rules change…

Of course, all this information applies now and as I have indicated some of the rules are likely to change. Even if you normally like to manage your own financial affairs, this is one area where it is worth taking advice. The key point to make is that you shouldn’t let the tax tail wag the dog. Don’t jeopardise your financial independence.

Budgeting a substantial sum for care and then giving money away gradually as you can, using a combination of the techniques above, should hopefully help you achieve the balance between being able to look after your own needs and being generous to the following generations.

Charles Calkin is a financial planner at James Hambro

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I am amazed that there is no

I am amazed that there is no reference anywhere in this article to the responsibility of the NHS, under the National Framework for NHS Continuing Healthcare Funding, towards patients, including the vast majority of those diagnosed with dementia, to provide them with the nursing care, together with accommodation and other residential costs, providing they have been successfully assessed under the Decision Support Tool arrangements to determine whether or not they have a primary health care need.

In addition, the 1990 Court of Appeal judgment in the so-called 'Coughlan Case' has similarly been over-looked. This precedent determined a benchmark for successful NHS nursing care funding applications.

Unfortunately, across the country, CCGs are routinely ignoring their lawful duties under the Coughlan judgment and the National Framework, deficiencies which appear to be deliberate. As a consequence, CCGs can be said to be conspiring to defraud some of our most vulnerable, elderly citizens of their pensions, property and other capital assets in order to fund their nursing care quite unlawfully.

The problem is even worse bearing in mind that local authority social services departments also fail to pay due regard to their own lawful duties. It is unlawful for local authorities to fund nursing costs over and above that determined in the Coughlan case. Yet that is precisely what is happening when they take on the cost of caring for the vast majority of those who fall below the current £22,300 asset level. It is the vast majority of these patients who, if the NHS had conducted their multi-disciplinary DSTs properly in the first place would not have suffered financial harm and would have qualified for funding at a much earlier period. This would have avoided the loss of their assets down to the level of £22,300.

This is a national disgrace. MPs do not wish to intervene. The press treats this issue as if it were contaminated with a deadly contagion. Is there anybody out there willing to take these criminals on?