UK Inheritance Tax and Intergenerational Planning: Providing for your Children and Grandchildren

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How to best provide for your children and grandchildren

We are hardwired to want to provide for our children, even after they have grown up.

But we must remember that passing money down the generations is not without issues – when should you do it, how much should you give, and who should you give it to are all questions that need a lot of forward planning.

The key is having the right balance between protecting your children’s and grandchildren’s future, without preventing them from developing the life skills they will need to manage their lives.

Ensuring the balance

There are two other important considerations – making sure that you don’t leave yourself financially exposed, and that you make gifts in the most tax-efficient way possible.

You must not assume that everything will be distributed as you wish when you die – or that the money will be paid over as soon as your beneficiaries come of age.

There have been many cases where children struggle to find a purpose in life because they receive too much money as soon as they turn 18.

Having to provide the basics for yourself was a good learning experience for you – giving your loved ones too much money too soon takes the chance to learn for themselves away from them.

Remember, if your family are financially established, there is no reason why you shouldn’t spend your money on yourself or give it to a charity whose work you feel strongly about.

Remember to provide for your own needs!

Before you do anything, you need to be absolutely certain of what you can afford to give away.

You need to be clear about your own financial needs, both now and in retirement, not forgetting the cost of residential care which may become needed at the end of your life.

Remember, unlike you, your children and grandchildren have their whole life ahead of them to earn money.

Despite this, giving money sooner rather than later can make a big difference to your family’s quality of life.

Children are the obvious recipients for gifts, but as we all live longer, people are increasingly skipping a generation and gifting to their grandchildren.

Start planning from your child’s birth

You can start thinking about your descendants’ finances as soon as they are born.

You can set up savings to provide for important stages in your children’s lives such as University or buying their first home.

You might think of paying them through University from your income, but this is likely to be at a time when you should be maximising your own retirement savings. What’s more 83% of students will never pay off the full amount of their student debt, according to the Institute for Fiscal Studies.

To retain an element of control, over how money is managed and when money passes to your beneficiaries, you should consider the use of Trusts in providing for your children.

Make sure that HMRC don’t take 40% of the money from your life insurance

When you have a life insurance policy, when you die, the money from it will be subject to Inheritance Tax. That’s because the life insurance proceeds will be added to the value of your estate. What’s more, due to the need to wait for probate, it can then take months before your loved ones receive the money.

This is far from ideal, however if your life insurance policy is in trust it does not form part of your estate, which means that there will be no tax to pay. It also helps to speed up the process of your family being paid as probate will not be required.

Tax considerations

Gifts will not attract Inheritance Tax if you survive seven years from the date of the gift. You can also give £3,000 a year up to the date of your death, Inheritance Tax-free.

On death, each of us can pass on an estate of £325,000 without incurring Inheritance Tax, and spouses and civil partners can pass on their allowances to each other, meaning the last to die can pass on £650,000 tax-free. Estates selling family homes on death are now given a further allowance of £100,000, rising to £175,000 per person by 2020, meaning couples with property may be able to pass on £1m free of Inheritance Tax.

Your UK Pensions and QROPS are a great extra estate planning tool as they fall outside your estate for Inheritance Tax purposes.

Beneficiaries receive the money tax-free if you die before age 75, or at their marginal income tax rate if you die after that.

With careful planning, you can make a real difference to your children’s  and grandchildren’s lives.

Whatever you choose to do, it is vital that you don’t leave yourself short and make sure that the gifts you do give don’t spoil the child’s journey to self-sufficiency.

Take advantage of the AAM Estate Planning Service

The AAM Estate Planning Service is designed to help you ensure that your hard-earned wealth is quickly passed to your loved ones with the minimum of tax payable, by providing you with a detailed Wealth Preservation Strategy identifying the key issues and providing focussed analysis and options.

If you have any questions, please do not hesitate to speak to your AAM Financial Planner or email us at [email protected]

Ian Black
Head of Financial Planning & Wealth Solutions
AAM Advisory Pte Ltd

Sources:
https://www.ifs.org.uk/publications/9965
https://www.gov.uk/inheritance-tax

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