"Passing on wealth is so much more than a long-forgotten Will sitting in a drawer only to be opened after you’ve gone. Helping your family, now, when their need is greater can be far more rewarding for you and beneficial for them."
Please be aware the below blog is older than 12 months, therefore the information may not be relevant or up to date.
It’s rude to talk about money. That’s something that many of us have drummed into us as small children. But in some instances, we really should talk about money. Take the subject of inheritance for example. Without an honest and transparent conversation with your loved ones now how do you know your wealth will be passed to those you feel will benefit the most?
In the past, the moment for deciding when, how and to whom to pass your wealth on to was left until later in life, when we had an idea of how we wanted our hard-earned wealth distributed, once we were gone.
However, the economics of life have changed significantly. The younger generation now face long term repayment of university fees along with the struggle to get onto the property ladder. And the pandemic has added to the tension bringing furlough and job losses into the frame.
Now may be the time to reconsider thinking about your wealth as something you leave to your next of kin when you die. Wouldn’t you prefer to support your children or grandchildren now if they have an immediate need for financial support? Acting now, while you are able to manage how your wealth benefits those you want to, could also help you by reducing or avoiding an IHT liability for your estate.
Inheritance Tax is becoming a bigger issue for more and more people. Since 2009 the average UK house price has increased by more than 50%1 which means more people’s estates are exceeding the nil rate band and triggering Inheritance Tax bills.
In 2019/20 HMRC collected more than £5.1 billion from thousands of families. In addition, the current threshold of £325,000 has been frozen until 2025/26 – in a move many commentators have described as a stealth tax – with the government predicted to receive £6.3 billion in 2023/242.
Let’s talk
In the article ‘How to have a conversation about money’3, the Money Advice Service offers some great tips on how to prepare for and start a conversation, including how to deal with any negative reactions and how to end positively, with a clear action plan.
You might want to take the opportunity to bring your financial adviser into the discussions to explain how your investments and pensions are managed. Much less stressful for all if this is arranged before you are gone.
Don’t wait until you’re gone
There are many opportunities available for gifting wealth during our lifetimes without attracting tax and quite possibly to reduce or remove the burden of IHT from our estates.
However, if you are thinking of helping a younger family member financially then you do need to consider the tax implications. Recent research4 has revealed that just 45% of people looking to gift money are aware of the rules and exemptions surrounding Inheritance Tax (IHT). Only a quarter (25%) of respondents admitted to possessing a ‘working knowledge’ of the rules surrounding gifting.
Everyone has an ‘annual exemption’ for IHT purposes which allows them to give away up to £3,000 each tax year. If you don’t use it, you can carry over any unused allowance to the following tax year
meaning you could potentially gift up to £6,000 without it counting towards your estate’s IHT liability; and this amount rises to £12,000 for a couple.
You can also make more substantial gifts, known as ‘Potentially Exempt Transfers’. In this instance, you need to live for seven years after making the gift for it to be totally tax-free.
Make a will and appoint executors
Gifting during a lifetime can be rewarding for you and your beneficiaries but does not remove the need to have a will prepared. Managing the affairs of someone who does not leave a will can put an extra burden on those left behind.
You won’t be around to oversee the distribution of your wealth so you will be relying on others to complete the process according to your wishes. How this is managed is up to you. Depending on the size and complexity of your estate, you should consider appointing executors. A trusted friend or member of the family, or your solicitor.
My important documents and where I keep them
Whether or not you decide to appoint an executor to oversee the distribution of your wealth after you’ve gone, you really should have all your important documents, for example share certificates, professional adviser contact details and bank statements, in a safe and readily accessible place. It’s very easy to file things away in favourite places but not so easy for those sorting out your affairs to find them – unless you make a list of what and who and where. Of course, it’s not such a challenge if you are around to explain before you leave but imagine the situation if you died prematurely. Without your list, those left behind would have the double stress of losing you and then of looking for and going through all your paperwork.
Keeping track
Taking advantage of the services provided by the latest ‘hubs’, such as the Quilter Investment Platform, could certainly help by providing an easily accessible and up to date list of many of your investments. The Quilter platform offers ‘family linking’ with discounts for family members using the platform.
Life assurance and trusts
Check your life assurance – you can use life assurance to either meet or reduce a prospective IHT bill. If it’s written in trust, the proceeds of the life assurance policy won’t be included in your estate. When you die the policy pays out to the trust which pays all or part of the inheritance tax bill.
Trusts can help reduce an IHT bill and give you control over how your assets are used by future generations. Some trust structures let you leave money without it being subject to IHT. However, the rules around this vary widely for different structures, so you should seek advice on how this could work for you
Don’t forget your pension.
Recent revisions to legislation covering defined contribution pensions provides for that type of pension to be gifted to your chosen beneficiaries under certain circumstances.
If you die before age 75, your pension can be passed on to a beneficiary and they won’t pay Income Tax on the money. If you die after 75, any income is taxed at that individual’s marginal rate. But regardless of how old you are when you die, your pension fund is exempt from Inheritance Tax – it’s outside your estate.
There are also other opportunities to consider. Setting up pensions for others, for example, your children and /or grandchildren is allowed, within certain limits. And gifting wealth this way should give your beneficiaries the incentive and opportunity to take over the funding of the pensions at a later date.
Keep it in the family
Passing on wealth is so much more than a long-forgotten Will sitting in a drawer only to be opened after you’ve gone. Helping your family, now, when their need is greater can be far more rewarding for you and beneficial for them.
If you’d like to learn more, please get in touch now.
By Daren Wallbank, Chartered Financial Planner
The value of pensions and investments can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
Inheritance Tax Planning is not regulated by the Financial Conduct Authority.
1 UK House Price Index - Office for National Statistics (ons.gov.uk)
2 Source – OBR – Inheritance Tax – Latest trends and forecasts March 2021
3 How to have a conversation about money (moneyhelper.org.uk)
4 IFS and the National Centre for Social Research (NCSR), May 2019 - Lifetime gifting: reliefs, exemptions and behaviours
