3 effective ways to pass your wealth to the next generation

Inheritance Tax

After a life of hard work, many people want to give their loved ones a helping hand by assisting them financially. This might be by opening a savings account for a grandchild or by becoming the Bank of Mum and Dad to help a child get onto the property ladder.

If you want to help your loved ones financially but aren’t sure of the best way to do so, read on for three effective ways to pass your wealth to the next generation.

1. Gifting can be a useful way to pass on wealth

Many people want to support their children as much as they can but doing so can be a tricky balancing act. You will also have to ensure that you have enough money to live a comfortable lifestyle in retirement, as well as considering the tax implications of your gifting.

These tax implications can be one of the most important things to consider when you are gifting money. If you aren’t careful, they can land your loved ones with a hefty tax bill when you pass away.

You may benefit from speaking to a financial adviser when considering making gifts, as they can help you to ensure that they don’t affect your lifestyle or incur any tax liabilities.

That being said, here are some of the ways you can gift whilst avoiding tax:

  • Annual Exemption: Each tax year (6 April to 5 April) you can give away £3,000 worth of gifts without their value being added to your estate for the purposes of Inheritance Tax. This exemption can also be rolled over one year, meaning you can gift £6,000 if you did not use your Annual Exemption in the previous year.
  • Exempted gifts: You can gift up to £250 to as many people as you like in any given tax year, as long as that person hasn’t received your whole Annual Exemption. Any gifts to your spouse are also exempt from Inheritance Tax.
  • Gifts from income: If you have enough income to maintain your usual standard of living, you can gift surplus income to your loved ones. If you’re considering this, it’s important to keep good records of your gift-giving to demonstrate gifts were regular and affordable.

2. Putting assets in a trust can help you to avoid Inheritance Tax liabilities

Simply put, a trust is a legal arrangement that lets the owner of something ‘gift’ it to someone else. This could involve cash, shares, property, or other investments which are held by a trustee on behalf of the beneficiary. The contents of trusts typically fall outside your estate when calculating Inheritance Tax.

This is done by creating a legal document called a trust deed, which sets out the terms and conditions under which the trust operates, known as the provisions. Once the trust has been opened, the policy can only be operated in line with these provisions.

You can use this to effectively pass your wealth to your children, reducing the amount of Inheritance Tax they would be liable for when you pass away.

3. Having a will ensures that your estate is distributed according to your wishes

One of the simplest ways that you can pass on wealth to your loved ones is to ensure that you have a will in place. Having a will allows your wishes to be known, ensuring that when you die your estate goes to the right people.

Despite the clear benefits of having one, a study by Royal London, published by Which?, found that more than half of UK adults don’t have a will in place.

If you don’t have a will, or it isn’t up to date, writing or updating your will should be done as soon as possible. A will can spare your family from significant amounts of undue stress, as well as the potential cost of legal fees.

Dying without a will is called ‘dying intestate,’ meaning that your assets will be distributed according to the laws of intestacy rather than your personal wishes.

This can be especially problematic if you have stepchildren or an unmarried partner, as only spouses or blood relatives can inherit under intestacy law. In some circumstances, this could even lead to your loved ones losing a family home.

Without a will, you and your loved ones will have no say in what happens to your estate and therefore you can’t guarantee that your wealth will be passed to them in line with your wishes.

If you want to ensure that your wealth is passed to your children in the way that you desire but aren’t sure where to begin with writing a will, you may benefit from speaking to a financial adviser.

Get in touch

If you want to pass on your wealth to your children but aren’t sure about the best way to do so, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.

Please note: The Financial Conduct Authority does not regulate estate planning, tax planning or will writing. Tax rules can change and any benefits depend on your individual circumstances.