Do you plan to pass your wealth on to your family? If you want to help your children and grandchildren with financial security, you must consider more than just the amount you’ll be giving them. The latest tax rules may mean you need to carefully consider how you do this, as well as the impact it will have on you.
If you would like to pass on a part of your wealth to your loved ones, you basically have two options: doing it whilst still alive or as an inheritance.
There are both pros and cons with either of these options. Passing on your wealth now means you get to see the impact the money has and, depending on the circumstances of your loved ones, it may have a bigger positive effect on their life. However, on the other hand, it may diminish their inheritance and you’ll need to think carefully about how it affects your wealth over the long term.
Whatever option you choose, efficiency should be considered. After all, you want as much of your gift as possible to go to your loved ones.
1. Use Your Gifting Allowance
When you give a gift, you may think it’s considered out of your estate for Inheritance Tax purposes. However, this isn’t always the case. Some gifts could still be considered to be a part of your estate for up to 7 years and may be liable for tax too.
There are a number of exemptions meaning gifts are immediately outside of your estate for Inheritance Tax purposes. This includes the annual gifting allowance of £3,000. If you want to give money to loved ones now, you should make use of this. It can be brought forward by a year, meaning that if you did not use your allowance in the previous tax year, you can efficiently give £6,000 this year.
2. Write A Will
If you would like to leave an inheritance to your family, writing a will is crucial. Even if you already have one in place, it would not do any harm to review it and make sure everything is up to date.
Having a valid will is the only way to ensure that your wishes are carried out. Despite this, more than half of British adults have not made a will. Not doing so would mean your assets are distributed according to Intestate Rules, which could be vastly different from your wishes. A will may also present an opportunity to mitigate tax.
You should review your will at least every five years and of course after changes to your family structure, such as new grandchildren, divorce, marriage and death.
3. Use A Trust
Another way to effectively remove a part of your wealth from of your estate is to use a trust. A trust could allow you to pass on money or assets to beneficiaries with one or more people, or perhaps even a company taking control. It is an arrangement that can be very useful if you want to pass any gifts on to children or vulnerable people.
There are several different types of trust and some are subject to their own tax regimes, so you need to fully explore your options before deciding to set up a trust.
Trusts can be complicated and once you’ve made a decision, it may be irreversible. As a result, it’s important that you seek both financial advice and legal advice before proceeding. Please contact us to discuss if using a trust is an option that is appropriate for you.
4. Remember Your Pension
Pensions can provide you with an income throughout retirement. But they may also present you with a chance to pass wealth to loved ones after you’ve passed away.
Cash taken out from your pension is generally considered to be part of your estate and, therefore, could be liable for Inheritance Tax. However, money that stays in your pension can be passed on more efficiently.
If you die before the age of 75, the money within your pension will not be taxed at all if it’s accessed within two years. After the age of 75, your beneficiary will be charged Income Tax, which could be far less than Inheritance Tax depending on their personal income.
If you want to leave your pension to a loved one, it’s important to note your pension doesn’t form part of your estate. As a result, it won’t be covered by your will. You should contact your pension provider to complete an ‘expression of wishes’ to let them know what you’d like to happen.
These four ways to pass money on efficiently aren’t the only options. Depending on your circumstances and goals, there may be other options that are more suitable. Please contact us to discuss your personal needs.
What Impact Will The Gift Have On You?
Whilst passing on wealth, tax efficiency is important, it’s also crucial that you measure the impact it could have on your plans and future. For example, would using a lump sum out of your wealth now to pass on as a gift leave you financially vulnerable in years to come? Would planned inheritance be at risk if you ended up needing long-term care?
You can’t know what’s around the corner but by making gifting part of your financial plan, you can help ensure everything stays on track. Please contact us to discuss how you’d like to financially support loved ones. We’ll help build a financial plan that reflects this, as well as your other goals.
Please note: The Financial Conduct Authority (FCA) does not regulate will writing, estate or tax planning.