Your guide to passing wealth to the next generation

Posted on April 27th, 2020 | Categories - News

The intergenerational transfer of wealth is something we will all likely need to think about at some stage in our lives.

The rise of the Bank of Mum and Dad – said to have lent £6.3 billion last year – is testament to the way in which older generations often find themselves looking after those that come after them.

Regardless of their age, your children will always be your children and that means potentially providing them with financial support well into your retirement and beyond, even setting aside trust funds or Junior ISAs for grandchildren.

Although it’s not a topic that many of us are keen to dwell on, you’ll also need to think about how you’ll pass your wealth on to the next generation after you’re gone.

  • Inheritance

The simplest way to leave money to your loved ones is to ensure you have a will in place.

A will allows your wishes to be known, setting out what you want to happen to your money when you die, ensuring it goes to the right people. And yet over half of UK adults don’t have a will in place.

If you don’t currently have a will or it isn’t up to date, writing or revisiting your will now should be a priority.

Dying without a will means that your assets will be distributed according to the rules of intestacy. You and your loved ones will have no say over what happens to your estate and therefore you can’t be sure your wealth will be distributed in a way that tallies with your wishes.

Write or review your will to make sure it is in line with your wishes and speak to us if you are unsure about any aspect of putting your will in place.

  • Gifting

Ensuring you have enough money available in retirement to live your desired lifestyle, whilst supporting your children and ensuring you don’t leave them with a hefty Inheritance Tax (IHT) bill, can be a tricky balancing act.

Having a long-term financial plan in place will help you ascertain the amount you can comfortably live on, and how much you intend to leave behind. We can also help you manage your estate to help make your plan a reality.

There are things you can do now to limit the impact of IHT on your loved ones. One thing you can do is to manage your IHT liability through gifting, giving funds away, and thereby taking them out of the value of your estate for IHT calculation purposes.

Types of gift

  • Exempted gifts

Small gifts of up to £250, including birthday or Christmas presents, are usually exempt. Gifts to your spouse, during your lifetime, are also exempt (as long as your spouse lives permanently in the UK).

  • Annual Exemption

The annual exemption means that you can gift up to £3,000 a year tax-free.

The exemption can also be carried forward for one year and applies per individual. That means that couples can gift £6,000 a year, or £12,000 if neither of you used your Annual Exemption last year.

  • Normal expenditure out of income

You can also make exempted gifts using the normal expenditure out of income exemption.

For this exemption to apply, you must be able to prove to HMRC that the gifted amount forms part of your normal expenditure, that it was made out of income, and that making the gift doesn’t impact your ability to maintain your normal standard of living.

Use gifting to help limit your liability for IHT tax, ensuring your loved ones aren’t left with a large IHT bill when you are no longer around.

Trusts

HM Revenue and Customs (HMRC) figures for the 2016/17 tax year confirm that more than £300 million was paid in Inheritance Tax on the proceeds of life insurance policies. Completing a simple trust form, however, would have allowed the policies to pass into trust on the death of the holder.

A trust is a legal arrangement whereby assets are held by a trustee, on behalf of a beneficiary, and trusts typically fall outside of your estate for IHT calculation purposes.

Consider placing any life insurance policies you hold in trust upon your death and you may save your loved ones from facing a large IHT bill.

Your pension

When considering the wealth you intend to leave to the next generation, don’t forget to factor in your accumulated pension fund.

Pension legislation changed in 2015 and you can now pass pension benefits to the next generation in some cases. If your retirement income is largely made up of non-pension investments, consider leaving the encashment of your pension until last, or even not drawing from it at all.

If you die before age 75 without having taken pension benefits, your unused pot remains outside of your estate for IHT calculation purposes. This means you can pass 100% of it on to any beneficiary you choose.

Choosing a beneficiary is done through your provider rather than via your will and if your chosen beneficiary keeps the inherited amount in a pension environment, it won’t form part of their estate either.

If you die after age 75, your beneficiary will pay tax on the amount they receive, at their marginal rate. The rules are also different once you’ve taken money from your pension.

Get in touch

If you’d like to discuss any element of estate planning or inheritance, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.

Please note:

The Financial Conduct Authority does not regulate estate planning, trust planning, tax planning or will writing. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

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