By Jonathan Sidlin, Financial Planner and Managing Director of HSC Financial Advisers
While everyone is concerned that they have enough money in later years to ensure a comfortable retirement, for many it is equally important to ensure that children and grandchildren can also benefit from wealth that has accrued whether from pensions, investments or excess income. In order to ensure that this is maximised, it is necessary to start planning at an early stage.
There are a number of products that have been developed to preserve and provide wealth transfer through generations. Although pensions have not historically been seen as a way to provide for the future generations this is not necessarily the case now. In the past, retirees purchased a guaranteed income for life, through an annuity, this was effectively terminated on death or perhaps the death of a spouse. Today however, there is much greater flexibility of pensions so that, through good financial planning, individuals can potentially provide for their children and, in turn, their grandchildren through their pension pot.
Gifting
Of course, one of the simplest ways to pass on your wealth is to gift it to your beneficiaries – providing this is done more than seven years before your death then there will be no inheritance tax. And even if you do die less than seven years after making the gift, as long as more than three years have passed the rate of inheritance tax will be reduced. You can also make smaller gifts at any time although there are limits as to the amount, large gifts must total no more than £3,000 but small gifts up to £250 are unlimited. Wedding gifts of up to £5,000 for your children and lesser amounts for grandchildren and others are also allowed. Regular gifts that come straight out of regular income are normally exempt, eg supporting a grandchild at university.
If you don’t have capital available to gift, it might be feasible to use an equity relief product to extract capital from your property for gifting and so reducing the size of your estate at death.
If you are planning to make a charitable bequest, it is worth considering the proportion of your estate that it will represent. If it is at least 10% then the inheritance tax due on your remaining estate will reduce from a rate of 40% to 36%. Any charitable gifting that happens during your life is entirely free from inheritance tax and so will also reduce the size of your estate.
Insuring against tax
It is actually possible to invest in a life insurance policy that is designed to cover the cost of inheritance tax on your death. A term assurance policy might also be a good idea, they are designed to cover the inheritance tax liability on gifts you have made assuming you die within the allowed seven years.
Trust funds
There are a number of different types of trust which also work to preserve wealth through the generations, these offer slightly different advantages and need to be selected according to your specific needs. For example, if you need to continue receiving an income from capital but do not need the capital itself, then a discounted deed of trust will be the most suitable choice for you as it allows for income generated to be received by you but the capital itself will fall outside of your estate for tax purposes.
A loan trust on the other hand allows you to access the capital at any time but protects any income from inheritance tax while discretionary trusts allow assets to be put aside for children and/or grandchildren or to protect funds for a vulnerable family member so that the funds may be managed on their behalf. The trustees of discretionary trusts can determine how much beneficiaries receive from the trust and when it is given. They are a flexible solution that protect assets if circumstances change.
Passing on a business
Business assets are generally treated differently in terms of inheritance tax and you will usually be able to pass them on without incurring inheritance tax whether done during your lifetime or after your death. In terms of land, buildings and machinery, this may well qualify for business relief at 50%. In the case of agricultural land which is part of a working farm, this is generally exempt from inheritance tax.
Planning is key
As with all things financial, planning is the key to success and taking action sooner rather than later. This is much easier if you have substantial funds so that you can start distributing your wealth at an early stage, safe in the knowledge that you no longer need that capital, but even with lower levels of wealth it is still possible to maximise the benefits that your children and grandchildren can receive. As ever, seek financial advice before taking irreversible steps.
Disclaimer: This is information only and does not constitute advice. Pensions/investments are medium to long term plans and are not guaranteed as past performance is not necessarily a guide to future performance. The value of units can go down as well as up. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
About Jonathan Sidlin, Financial Planner and Managing Director of HSC Financial Advisers
Jonathan is a Chartered Financial Adviser who graduated from the London Institute of Banking and Finance. His expertise covers most areas of the Financial Planning process, including Pensions and Investments, Tax Efficient Products and Estate Planning Solutions. With an increased focus on sustainability, Jonathan is working to bring more ESG investment options to his clients.
Jonathan’s clients come from all walks of life and include all ages. Whether it’s a first-time buyer looking to purchase a home, individuals and business owners looking to grow their wealth, or a retired person wishing to draw an income and/or provide for the next generation, Jonathan has strategies for each unique situation.
Jonathan believes that financial success is built around a basic understanding of money and the choices individuals make when it comes to their finances. Jonathan works with his clients on a personalised basis taking them on a journey to create a tailored financial plan.
Jonathan offers uncomplicated, authentic advice and prides himself on being down to earth and jargon free. His goal is to make financial wellbeing accessible to all and enable more people to achieve long-term financial freedom.
Website: www.hscfinancial.co.uk
