Making the most of your money.
Planning with your goals at the forefront
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
Passing on Wealth
Wealth is increasingly becoming an intergenerational issue. Parents today frequently dip into their savings to help their children buy their first homes, and grandparents may find themselves providing financial assistance to young families. As a result, it’s important to consider when and how you will pass on wealth to the next generation when the time comes.
There are essentially two ways to pass on wealth to loved ones:
Inheritance
Perhaps the most common way to pass on wealth is to leave an inheritance when you pass away. Your wishes should ideally be laid out in a will, and you should have a clear idea of how you want your wealth to be distributed. If your estate is likely to exceed the threshold for Inheritance Tax (IHT), you should consider how to reduce your tax liability.
Gifting
An alternative is to gift money during your lifetime. This has the added benefit of allowing you to see the joy and financial security your wealth brings to those you love. One thing to remember is that while some gifts are immediately considered outside of your estate for IHT purposes, others may not be for up to seven years.
Thinking about leaving wealth to loved ones can be a bittersweet experience, and you may be uncertain about the best option for you.
The following questions are designed to provide some guidance for your decisions and help you weigh the pros and cons.
Who do you want to benefit?
First, consider who you would like to benefit from your wealth. While children and grandchildren are often the primary focus, you may also want to provide support to extended family or friends. Thinking about beneficiaries allows you to assess their financial situation alongside your own. It can also impact potential inheritance tax (IHT) liabilities. For example, leaving your main home or the proceeds of its sale to children or grandchildren can increase the portion of your estate that can be inherited tax-free, thanks to the Residence Nil-Rate Band.
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How do you want your estate to be divided?
Once you have an idea of who you would like to inherit or receive gifts from your estate, it's important to consider how to divide it. There are various ways to do this, such as specific bequests for particular items, pecuniary bequests for fixed sums, or residuary bequests for a portion of your estate. Combined with an assessment of potential IHT liabilities, it may become evident that gifting some of your assets now could be a better option than leaving them as an inheritance.
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Would beneficiaries benefit from receiving financial help now?
While your own financial security and wishes should be a priority, it's also important to consider the impact your decision will have on your loved ones. Some beneficiaries may benefit more from a gift now than from a larger inheritance later. For example, young families struggling to buy a home may improve their long-term financial security through a gift rather than waiting for an inheritance. Furthermore, various exemptions currently in place may mean that gifting money during your lifetime could reduce or eliminate Inheritance Tax.
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How would taking a lump sum out of your wealth affect your plans?
Considering the previous question, it's crucial to carefully assess how a gift may affect your own plans and financial security. Would taking a lump sum out of your estate now leave you struggling in the future? Would you still be able to cover unexpected costs, such as care? Assessing your wealth is essential if you're considering giving a gift to your loved ones. Engaging in financial planning can help provide confidence in your decision-making process.
How will your assets be depleted during retirement?
If you're aiming to leave an inheritance, it's important to assess how the value of your estate will change over time. Consider factors such as life expectancy, cost of living, inflation, interest rates, and investment returns. Understanding these factors will help you make decisions on how and to whom you leave your wealth, as well as whether Inheritance Tax (IHT) may be due.
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Is your estate likely to be liable for Inheritance Tax?
By valuing your entire estate and calculating how it's likely to change, you can determine the likelihood of an IHT bill. For the tax year, a single person can pass on £450,000 IHT free with both the Nil Rate Band and Residence Nil Rate Band combined, or £900,000 for couples who are married or in a civil partnership. These allowances will increase to £500,000 and £1 million respectively in the following tax year. If your estate may be liable for IHT, there are usually steps you can take to reduce the amount due, such as gifting. Proactive estate planning ensures your beneficiaries receive as much of your estate as possible, rather than the tax man.
Are your wishes known?
Make sure your wishes are clear and known. Start by writing a will that outlines how you want your estate to be distributed when you die. Without a will, your estate will be distributed according to the Intestacy Rules, which may differ from your desires. Additionally, ensure you have a Power of Attorney in place, giving someone you trust the ability to make decisions on your behalf if you become unable to do so.
If you're considering how your wealth could benefit your loved ones, we're here to provide support. Whether you believe gifting or inheritance is the right option for you, our goal is to give you confidence in your finances and improve the financial security of your family and friends. For many, it's not a choice between gifting or inheritance; blending both options to pass on wealth is common. We can show you how different options would impact your lifestyle, IHT bill, and more.
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HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
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For specialist tax advice, please refer to an accountant or tax specialist
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Will writing not part of The Openwork Partnership offering and are offered in our own right. The Openwork Partnership accept no responsibility for this aspect of our business. Wills are not regulated by the Financial Conduct Authority.
