If you are retired or coming up to retirement, you might be thinking about passing on some of your wealth to support younger family members, particularly during these difficult economic times.
Perhaps you have already made or updated your will to ensure you leave a legacy to your children or grandchildren. Once you have made your will as tax efficient as possible, you could consider other forms of estate planning during your lifetime to lay solid foundations for your family’s future.
After all, most of us would like to leave a legacy, and this makes financial planning essential. Here, we look at ways to manage wealth between generations, while also reducing your liability to inheritance tax (IHT).
Before giving any money away, it’s important to consider whether you might need this in the future. A cashflow forecasting exercise with a financial adviser can help to clarify what your income and expenditure – and your financial position – might be in the future.
Remember that your spending patterns could change throughout your retirement. In the early years, you could have more time on your hands for hobbies, whereas in older age the costs of social and nursing care could become an issue.
Gifting for today and tomorrow
Lifetime gifts to family can be an effective way to pass on wealth to your loved ones, rather than waiting until death before passing on assets through your will. For example, money gifted to a younger relative could be put towards a property deposit, or higher education costs, thereby giving them a significant financial boost at a time when their finances are already stretched.
There are several different gifting allowances to take advantage of. They can be complicated, so it’s crucial to get advice on how to use them correctly. For example, current rules allow you to give away £3,000 per year free from IHT. You can also give up to £250 to any number of people each year. Parents can give £5,000 to each of their children as a wedding gift, while grandparents can give £2,500, and anyone else £1,000. Alternatively, if a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away free from IHT.
Larger gifts may be covered by the potentially exempt transfer (PET) rules. If you survive for a further seven years after making the gift and no longer derive any benefit from it, then the gift is outside of your estate for IHT purposes. If you pass away within seven years and the gifts are valued at more than the nil-rate band (currently £325,000), taper relief may apply. The tax due reduces on a sliding scale if the gift was made between three and seven years before death.
Taking control with trusts
You might want to maintain some control over the gift, or require some future access to the assets, in which case you could consider using a trust.
There are different types of trusts and they vary in terms of flexibility, access, control and tax efficiency. They can help you have some control over access while a child or grandchild is young, decide who benefits from the trust fund and in what proportion, and protect your legacy from potential marital disputes among beneficiaries.
If you want to make gifts but don’t want to lose all future access, discounted gift trusts could provide an effective solution. These are designed for people who want to gift money, draw a regular income for the rest of their life and then pass what is remaining of the gift to their heirs potentially free of IHT after their death.
Trusts are an extremely complex planning area, so specialist advice is essential.
Leaving a charitable legacy
Gifts to charities and political parties are also tax-free. Leaving a financial legacy to your chosen charity could be beneficial in several ways while, with careful financial planning, keeping the amount you have to leave to family intact. The legacy itself is exempt from IHT and if it exceeds 10% of the ‘net value’ of your estate (chargeable estate less standard nil-rate bands), a reduced IHT rate of 36% applies. The legacy could also result in the reinstatement of some of your residence nil-rate band.
In other words, the majority of a substantial charitable bequest could be funded from a reduction in IHT rather than a reduction in the amount inherited by family.
Passing on your retirement pot
If you have built up substantial retirement savings, bear in mind that pensions are often one of the most tax-efficient ways to pass on your wealth. You can potentially pass on your pension to your loved ones as their own retirement pot.
If you have a pension that enables you to do as you wish with your retirement savings – such as a self-invested personal pension (SIPP), or drawdown pension – and you die before reaching age 75, it can usually be passed on free of tax. Benefits remaining in these types of money purchase pensions can be paid tax free as a lump sum, annuity or drawdown income to any beneficiary. After the age of 75, death benefits can still be paid as a lump sum, annuity or drawdown pension, but benefits will be taxed at your beneficiaries’ marginal income tax rates.
How we can help
Whatever your individual circumstances and estate planning objectives, getting some smart advice can help you develop a strategy that is right for you. This could encompass the use of pensions, gifts, trusts, life assurance or even IHT-efficient investments to maximise the potential of your assets for future generations. Ultimately, succession planning is about enabling families to consider their current and future needs, as well as effectively passing on wealth.
The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Information is provided only as an example and is not a recommendation to pursue a particular strategy.
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