Do you plan on pass on wealth to loved ones? If you want to help your children and grandchildren become more financially stable, you need to consider more than just the sum you’ll be giving them. Tax rules could mean you need to think more carefully about how you do this, as well as the impact it may have on you.
If you want to pass on some of your wealth to loved ones, you essentially have two options: do it during your lifetime or as an inheritance.
There are pros and cons to both these options. Passing on your money 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, it can 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.
- Use your gifting allowance
When you give a gift, you may think it is considered out of your estate for Inheritance Tax purposes. However, this isn’t always the case. Some gifts can still be considered part of your estate for up to seven years and could be liable for tax as a result.
Importantly, there are some exemptions that mean 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 carried over by a year, so if you didn’t utilise your allowance last tax year, you could efficiently give £6,000 this year.
- Write a will
If you’re hoping to leave an inheritance to your loved ones, writing a will should be the first thing you do. Even if you already have a will in place, it may be worth reviewing it.
Having a valid will is the only way to ensure that your wishes are carried out. Despite this, more than 50% of British adults have not made a will. By not doing this means your assets are distributed according to Intestate Rules, which could be vastly different from your wishes. A will can also present an opportunity to mitigate tax.
Ideally, you should review your will every 5 years and after big life events, such as new grandchildren arriving, marriage or divorce.
- Use a trust
Another way to take a portion of your wealth out of your financial estate is through using a trust. A trust allows you to pass on assets or money to one or more people, or even a company taking control. It is an arrangement that can be very useful if you want to pass gifts on to children or vulnerable people.
There are many 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 quite complex and once you’ve decided, it may be irreversible. As a result, it’s important that you seek out both financial and legal advice before proceeding. Use a recommended financial adviser for this.
- Remember your pension
Pensions can provide you with a regular income throughout retirement. But they can also present you with a chance to pass on wealth to loved ones after you’ve passed away.
Money taken out of your pension will be considered to be part of your estate and, therefore, potentially liable for Inheritance Tax. However, money that stays in your pension can be passed on 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. Over the age of 75, your beneficiary will be charged Income Tax, which can 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 get in contact with your pension provider to complete an ‘expression of wishes’ and let them know what you want to happen. You may also want to consider pension consolidation, in case you have several pensions scattered across different companies.
These 4 ways to pass down money efficiently are not 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 equally as important, it’s also crucial that you measure the impact it could have on your plans and future. For example, would taking a lump sum out of your wealth now, to give as a gift, leave you financially vulnerable in later years? Would a planned inheritance be at risk if you later need long-term care?
You cannot know what is around the corner, but by making gifting part of your financial plan, you can help ensure everything stays on track.