The ultimate balancing act: Gifting versus saving

Warren Buffett once said, “Someone is sitting in the shade today because someone else planted a tree a long time ago.”

This quotation perfectly encapsulates the feeling of leaving a legacy for the next generation. In your own financial plan, you may wish to prioritise “planting a tree” today so that your children and grandchildren can “sit in the shade” after you’re gone.

For many, this means gifting wealth over the course of your lifetime, helping the next generation fund key milestones including weddings, first homes, and school fees for your grandchildren.

Not only could giving these funds away be good for your children, but it may also help to mitigate Inheritance Tax (IHT) later.

While this is an exciting prospect, you may have a few doubts in your mind about gifting wealth. After all, you are likely entering – or about to enter – your retirement years and know that you need to be able to live comfortably for many years to come.

Keep reading to learn more about the delicate balancing act between gifting and saving.

3 helpful gifting options for reducing Inheritance Tax

First, let’s briefly cover some of the tax-efficient gifting options you could explore.

1. Gifting from surplus income

If you take a regular income and routinely have funds left over, this is known as a “surplus” and could be gifted tax-free to the next generation.

Here are some of the rules you need to be aware of:

• You need to be able to prove that the money comes from surplus income, not capital. For example, if you earned £10,000 a month and had £1,000 left over after savings, luxuries, and bills, this is provable as surplus income. Whereas, if you took £1,000 a month out of your savings account and gifted it away, this would be viewed by HMRC as coming “from capital” and may be taxable (more on this later).
• The gifts must not affect your quality of life. Making cutbacks to afford regular financial gifts to your children may affect the tax efficiency of the gift. Speak to a financial planner if you’re unsure about this rule.
• You should ideally make these gifts regularly over a period of a few years. That way, HMRC can review your outgoings and recognise this as a pattern of gifting from surplus income.

Unlike other gifting options, which you will read about below, gifting from surplus income (if you follow the above rules) is tax-free. You can gift as much as you like.

2. Using your annual exemption

As of 2024/25, you have an annual exemption of £3,000 a year. This allowance represents the amount you can give away from capital sources – savings and investments – split among as many people as you like.

Of course, you can give away more than £3,000 (it’s your money, after all). The crucial factor to understand is that if you pass away fewer than seven years after giving the gift, it could remain within your estate for IHT purposes.

For example, if you gave away £10,000 to your child as a lump sum, this is known as a “potentially exempt transfer” (PET) and may be liable for IHT if you pass away within seven years of the transfer. If you survive this period, the gift is entirely IHT-free.

3. Trusts

Ringfencing wealth within a trust could help you retain some control over the money you give away. Different trusts have different individual rules, but usually, your appointed trustees have the power to stipulate how the funds are distributed, when, and for what purposes.

You could also pay IHT differently if you put wealth in trust. The rate of IHT can be reduced from 40% to 20% in some cases, and you may be able to pay your bill gradually.

The all-important question to ask yourself if you’re worried about affording your gifting plans

You might find the idea of giving wealth away gradually very appealing, but stop yourself from going ahead because of worries or doubts. Rightly so, you could be concerned that you will run out of funds in old age if you give too much away now.

If you are familiar with this dilemma, this one question could help to shift your perspective.

Is there any evidence for my concerns?

Here at Kellands, time and again we meet clients who are truly worried about gifting money to their loved ones due to unfounded anxieties. Of course, it’s natural to worry, but sometimes a scarcity mindset can get in the way of achieving your goals and helping your beneficiaries do the same.

When you engage with a financial planner, we will:

• Assess your income and outgoings
• Analyse your savings and investments
• Review your capacity for loss and appetite for risk
• Use cashflow modelling software to forecast future scenarios
• Provide a full report based on our findings, explaining the benefits and risks associated with our recommendations as well as why we may have discounted other options
• Meet with you annually to ensure you are on track to meet your goals and make any adjustments you might need.

You may find that your hopes of “planting a tree” for the next generation can be lived out sooner than you had hoped. Or, that with a few tweaks, your initial plans can be made more affordable with the support of a planner.

Get in touch

Our experienced financial planners are here to advise on all financial matters regarding gifting, estate planning, and IHT.

Email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

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

All information is correct at the time of writing and is subject to change in the future.

All contents are based on our understanding of HMRC legislation, which is subject to change.

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

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