The global pandemic has encouraged many families to review their own estate plans. Steve Wright, our Estates Director, explores what to consider when passing wealth to future generations.
In recent weeks many clients have been in touch to discuss re-structuring their estate plans – with a specific focus on ensuring that cash and assets can be passed on tax-efficiently. Although most people have some form of planning already in place, such as a Will, the pandemic has prompted a check on whether things are up-to-date and tax-efficient.
It’s also clear that both the immediate and long-term consequences of Covid-19 will mean that financial priorities may shift. Some feel they need to be ready to provide cash to help future generations, which could mean that retirement plans or investment strategy need to alter.
Another factor driving concerns are expected tax rises, which may be introduced to help pay for the extraordinary financial toll the pandemic has taken on the economy. One area which could be targeted is Inheritance Tax, so many families are keen to consider ways in which they can gift capital and assets ahead of any changes in legislation.
With these concerns in mind there are a number of areas which it might be useful to consider:
Fast forwarding inheritance
Unlimited sums can be passed onto your children, grandchildren or other beneficiaries whilst you are still alive, free from IHT, as long as you survive for seven years, and the gift is, generally, unconditional. Bringing gifts forward can be a useful way of sharing your wealth now, safe in the knowledge that you – and they – can enjoy the tax reliefs already available.
Transferring assets is another way to take advantage of the existing tax relief rules. It might be sensible to gift assets from a Capital Gains Tax (CGT) perspective, as they may have actually fallen in value as a result of the pandemic. Another advantage of gifting shares is that any subsequent IHT bill will be based on their value at the time of transfer, although the shares themselves may have subsequently risen. Do note that although assets can be passed between spouses without attracting CGT the same isn’t true if you gift them to a child or grandchild, but allowances are available. Reviewing your portfolio with your adviser may help identify sensible actions and trusts can be used to pass the assets on without payment of CGT for larger gains, subject to the normal Inheritance Tax Nil Rate Bands.
Sharing the wealth
With families now consisting of three or four generations, the financial pressure on younger members could be significant compared to older ones who are likely to own property and have pensions in place. As a result some families may want to share the wealth, or provide financial support, early. Changing plans can cause family issues, especially if some beneficiaries receive their inheritance early whilst others do not. It’s always sensible to take any decisions carefully, and explain your thinking to avoid any rifts.
Providing regular, long-term, gifts to family members is a very efficient way of sharing wealth. A regular, recorded gift out of your genuinely spare income is exempt from IHT. A good example is for grandparents to pay their grandchildren’s school fees, removing the financial burden for parents. One-off gifts are also possible – you can give away up to £3,000 each year free from IHT, and there are other allowances for wedding gifts if and when appropriate.
Passing wealth through generations is also possible by using a trust. £325,000 per individual, and £650,000 for a couple, can be put into a trust without triggering IHT. This could again be used to cover school fees, or act as an emergency fund which may be particularly useful given the current situation, especially because of the likely repercussions for the economy for some time to come.
Although you may have a compelling reason to pass on wealth now to help those who are struggling during the crisis, do be aware that you need to consider your own financial position too. Your pension or regular dividends may have suffered from recent market volatility. In short, don’t overstretch yourself.