Traditionally, people wait to pass on their wealth to their children and grandchildren when they die. But there are several reasons why passing on assets during your lifetime could be worth considering.
While the approach that’s right for you will depend on your individual circumstances, making lifetime gifts could not only prove tax efficient, but also make a bigger difference to your family’s financial wellbeing.
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Everything you need to know about leaving a tax-efficient legacy for your loved ones.
Here, we look at what to consider when deciding when to pass on wealth to your loved ones.
What’s your estate’s IHT liability?
Leaving assets to children and grandchildren via a will is very common, but it is actually one of the least tax-efficient ways to pass on wealth. When you die, your estate will be valued for inheritance tax (IHT) purposes, and the portion of your estate that exceeds £325,000 (the IHT nil-rate band) will be taxed at 40%.
On a sizeable estate, IHT of 40% could translate into a significant sum of money. Despite this, our research of 7,000 people – 2,000 of whom were over-55 with children, and 5,000 of whom were under-55 with living parents – found that almost a third of parents with £1m+ in savings and investments said they expect to pass on money when they die.
If you pass on your main residence (or the sale proceeds of it) directly to your children or grandchildren when you die, you might qualify for the additional residence nil-rate band. However, this is currently only £175,000 and is tapered if your estate exceeds £2m.
Overall, an individual could potentially pass on a maximum of £500,000 before IHT kicks in. It’s possible to transfer any unused element of your IHT allowances to your living spouse when you die, which effectively doubles the limit to a maximum of £1m.
Could lifetime gifts be more beneficial?
Another way of passing on wealth is to gift money while you’re still alive. As well as being tax efficient, passing on wealth through lifetime gifts could be more beneficial for your children and/or grandchildren.
Rising life expectancy means that those who receive an inheritance via a will could be well into their 60s, by which point they may not need as much financial support. For a young adult, however, a financial gift could make a huge difference – perhaps enabling them to graduate from university debt-free or put down a deposit on their first home.
Our survey found that among respondents aged 18 to 24, nearly two-fifths wanted financial help from their parents ‘now’ – far higher than those in older age groups.
Having an open conversation with your family about their needs and expectations could be a good place to start.
Are you making the most of gifting allowances?
Another benefit of giving away money during your lifetime is that it reduces the size of your estate, which in turn can help to reduce your estate’s IHT liability.
There are a range of allowances that can enable you to gift money tax efficiently. These allowances aren’t straightforward, so it’s important to speak to a financial adviser before getting started. Gifting allowances include:
- Gifts of up to £3,000 each tax year – this is known as your ‘annual exemption’
- Gifts for weddings or civil partnerships – each tax year you can give up to £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to any other person
- Gifts from regular income
- Small gifts of up to £250 per person per tax year (so long as you haven’t used up another allowance on the same person)
Larger gifts are ‘potentially exempt transfers’ and you need to live for at least seven years after making the gift for it to be tax free. It’s important to keep a record of any potentially exempt transfers you make, which a financial adviser can help you with.
How much can you afford to give away?
Before you give money away, it’s important to understand how this could affect your own future finances. If you give more than you can afford, you might have to make cutbacks later on or, worse, run out of money. A financial adviser can use cashflow modelling to illustrate the impact that lifetime gifts would have on your long-term savings, so that you can make a more fully informed decision.
Knowing when and how to pass on wealth isn’t always easy, and that’s where getting some smart advice comes in. By taking the time to understand your needs and wishes, a financial adviser can help you manage your estate’s IHT liability and build an estate plan that works for you and your family.
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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. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
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