For many people, the challenges of the pandemic have changed their mindset on lifestyle and financial planning. As well as this, the uncertainty of this time has shifted many of the foundational concepts in estate and intergenerational planning. Not least in how the distribution of personal wealth and Inheritance Tax (IHT) planning can take place earlier in life.

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The ability for parents and relatives to be able to see the visible benefit of their wealth on their loved ones has been placed in the foreground through this difficult time. And, with the financial challenges facing younger generations in housing costs, lower wages and increased cost of living, this benefit can make a real difference. In this article, we will outline some of the key options you have available in approaching your estate planning differently to benefit the next generation today.

Gifts

Gifting your assets or cash to loved ones can be a great way to see the benefits of your wealth while you are still alive.

Gifts to friends and family are also a legitimate way to reduce the amount of Inheritance Tax paid on your estate, although this is strictly governed. The UK government offers a maximum annual gift allowance of £3,000. Anything more than this will incur IHT. However, if you plan your inheritance gifts early, you will be able to contribute a considerable sum over time. It’s worth remembering that gifts from surplus income are not subject to IHT.

Children’s Pension

Investing into a children’s pension is an often-overlooked way to pass on your wealth to the next generation. A children’s pension can be set up on the day the child is born and contributed to through to their 18th birthday. The pension must be set up by either a parent or legal guardian, but anyone can contribute to it.

A children’s pension benefits from generous tax relief and as such the maximum amount that can be contributed is capped to £2,880 per annum (£3,600 after 20 per cent tax relief is added). However, contributing the maximum amount over 18 years is likely to create a substantial pension pot for the beneficiary by the time of their retirement.

Any contribution to a children’s pension does fall under the IHT annual gift allowance of £3000.

Junior ISAs

Junior ISAs are another tried and tested saving option for passing on your wealth. Unlike a children’s pension, they can be accessed by the beneficiary at the age of 18. There are two types of Junior ISA, a Stocks & Shares ISA and Cash ISA, and a child can have one of each type. The annual allowance for Junior ISAs for the 2021/22 and 2022/23 tax years is £9000. As with other cash gifts, contributions to Junior ISAs do fall under IHT legislation.

Schooling Trusts

Paying for a child’s education is perhaps one of the most rewarding and beneficial ways to pass on your wealth. With school fees currently ranging from £15,000 – £33,000 per child per year, this is a significant expense, which could be alleviated by the contributions from a trust. This option may be ideal for those parents or grandparents who wish to save money over a period of time to fund these expenses.

Grandparents wishing to help out with school fees, or wanting to make a tax efficient disposal of their assets, may want to consider a Discretionary Trust. An individual can give away up to £325,000 without incurring Inheritance Tax and by doing this their own estate could be reduced by £325,000, thereby potentially saving 40% IHT tax as long as they continue to live for at least a further 7 years.

Keeping your will up-to-date

Perhaps one of the most important acts in your estate planning throughout your life is making sure that your will remains up-to-date, particularly after any life changes.

Taking financial advice before creating your will can help to reduce your inheritance tax burden on the next generation. An up-to-date will makes sure your entire estate is accounted for and distributed according to your wishes, making family arrangements more straightforward at a difficult time.

Talk to us

There are many different approaches for handling your estate planning, which can benefit your loved ones today and in the future. At Grosvenor Wealth Management, we’ll talk through your individual circumstances, weigh up the potential advantages & disadvantages, and advise you on all the implications and possible alternatives, so you can make an informed decision.

PLEASE NOTE: Grosvenor Wealth Management Ltd is authorised and regulated by the Financial Conduct Authority. The value of investment can go down as well as up and you may not get back the original amount you invested. Tax treatment is dependent on individual circumstances and may be subject to change. Tax planning is not regulated by the Financial Conduct Authority.

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