Firstly, it’s important to consider the purpose of the gift. Are you giving the lump sum to help your young adult buy their first home.  Perhaps to start their a business.  Or fund their education? By having a clear purpose in mind, you can help guide your young adult in how to use the money.

Next, consider the best way to give the gift. Will it be a one-off lump sum or given as regular payments? Will it be given as a loan or as a gift? These are important questions to consider, and it’s important to have a frank conversation with your young adult about your expectations.

If you’re giving the money as a gift, consider the tax implications. In the UK, there are inheritance tax rules that may apply if you give a large sum of money as a gift. However, there are also exemptions and allowances that can be used to reduce the tax liability. It’s important to speak with a financial advisor to understand the tax implications of giving a gift.

USING THE MONEY WISELY

Once you’ve given the lump sum gift, it’s important to encourage your young adult to use the money wisely. Here are some tips on how they can make the most of the gift:

Pay off debt with a lump sum:

Does your young adult have any high-interest debt, such as credit card debt or student loans?  Using the gift to pay it off can save them money on interest charges in the long run.

According to the Office for National Statistics (ONS), the average household debt in the UK in 2021 was £60,900, which includes mortgages. However, for young people specifically, the picture is different.

Here are some key statistics on young people’s debt in the UK:

• Student Loans: According to the Student Loans Company, the total amount of outstanding student loans in the UK in 2021 was over £160 billion. The average student loan debt for students who started university in England in 2020 was £39,000.  It is worth pointing out that this debt rises by 9% a year for recent students.
• Credit Card Debt: According to a survey by The Money Charity, in August 2021, the average credit card debt per household in the UK was £2,562. However, this figure is likely to be higher for young people who are more likely to use credit cards to make purchases.
• Personal Loans: According to the Bank of England, the outstanding amount of personal loans in the UK in 2021 was over £147 billion. While data on the age breakdown of personal loan borrowers is not readily available, young people are more likely to take out personal loans to cover unexpected expenses or consolidate debt.
• Rent Arrears: According to a survey by the Joseph Rowntree Foundation, in 2020, 1 in 6 renters in the UK were behind on their rent payments due to the COVID-19 pandemic. Young people are more likely to be renters and therefore may be more vulnerable to rent arrears.

These statistics highlight the financial challenges faced by young people in the UK, especially when it comes to debt.

Invest a lump sum in education or training:

Investing a lump sum in further education or training can lead to better job prospects and earning potential in the future. The gift could be used to fund a postgraduate degree, vocational training or professional qualifications, apprenticeships.

Save for a home:

Saving for a deposit on a first home can be challenging, especially for young adults. Using the lump sum gift as a deposit or to boost their savings could help them get onto the property ladder.

According to a survey by Legal & General, in 2021, parents and grandparents in the UK gave an estimated £3.4 billion to help their children and grandchildren get on the property ladder. The survey found that:

• 42% of all first-time buyers received financial help from their parents or grandparents to buy their first home.
• The average amount gifted for a deposit was £20,000, with the largest gifts made in London and the South East.
• 9% of all parents or grandparents who gave financial help to their children or grandchildren for a home deposit went into debt to do so.
• In some cases, the gift was given as an early inheritance, with 15% of parents and grandparents giving money earlier than they had planned.

The most common reasons for giving the gift were to help children and grandchildren get on the property ladder, to support them financially during the pandemic, and to provide an early inheritance.

These statistics show that parental and grandparental financial support is a significant factor in helping young adults in the UK to get on the property ladder. However, it’s important to remember that giving a gift of this nature can have tax implications, and it’s important to seek professional advice before making any significant financial gifts.

Start a business:

If your young adult has an entrepreneurial spirit, they could use the lump sum gift to start their own business or invest in an existing business. This can be a high-risk but potentially rewarding way to use the money.

Invest for the future:

Investing the lump sum gift in a diversified portfolio of stocks and bonds could provide long-term growth potential and potentially generate income in the future.

It’s important for your young adult to consider their options carefully and seek professional financial advice if they are unsure. By making informed decisions, they can make the most of the gift and set themselves up for a brighter financial future.

Tax Implications for Lump Sum Gifts

When it comes to giving lump sum money as a gift, there are a few things to keep in mind.  Especially from a tax perspective if you give a gift that is valued over the annual exemption limit of £3,000.  In which case, you may be liable to pay Inheritance Tax (IHT).    But only if you pass away within seven years of making it.  Similarly, there are also rules around gifting larger sums of money.  Taper relief can apply depending on the number of years since the gift was made.  Additionally, if you give money regularly to the same person, it may be considered a ‘gift with reservation of benefit’.  This could still be subject to IHT.

Seek professional advice before giving significant financial gifts and be aware of potential tax implications. Laws and regulations for inheritance tax, gifting, and financial planning vary by jurisdiction, so consult a financial advisor or legal expert. Links to relevant UK government websites have been provided.