Planning for the future is the cornerstone of wealth management, but there are lots of mistakes people make when coming up with a financial strategy.
This article will seek to address these mistakes and mitigate one of the most common issues of intergenerational wealth planning – tax.
What is intergenerational wealth planning?
Simply put, it’s the practice of contributing to the financial future of your family. This can happen as a group effort that includes the family members in question, but more often than not, it’s mapped out by parents or grandparents who are passing down their wealth, with the help of a financial advisor.
Popular reasons for intergenerational wealth planning include helping younger family members get onto the property ladder, save effectively, and generally speaking, have more money available to them throughout their lives.
Inheritance tax and intergenerational wealth
Perhaps unsurprisingly, the most common form of taxation that affects intergenerational wealth planning is inheritance tax, also known as IHT.
What is inheritance tax?
IHT is the tax on the estate of somebody who dies, which includes property, money in the bank, and their possessions. The tax threshold, or nil rate band, for IHT is £325,000, with anything under this being tax-free and 40% tax usually applying on any amount over.
Mitigating IHT with gifts
A popular way of mitigating inheritance tax is by transferring wealth while you’re still alive as opposed to after you pass. While it’s important to seek financial advice in this regard, if there are certain exemptions that are commonly utilised:
- Small gift exemption.
This exemption allows unlimited small gifts in a given tax year up to the value of £250. A key caveat of this, however, is that the gifts in question aren’t exempted in another way.
- The annual IHT exemption.
The limit for this allowance is £3,000 and you can gift this amount without the value being added to your estate value. This allowance can also be carried forward by a single tax year if not used in the previous one.
If you’re married, you can combine your allowance to equal £6,000 in one year or up to £12,000 the following year.
- Gifts in consideration of marriage.
You can make a tax-exempt gift of up to £5,000 to your child when they’re getting married. Grandparents can contribute £2,500 to their grandkids or up to £1,000 to other family members in the same scenario.
Trusts, investments, Wills, and pensions
Higher earners might consider establishing trusts for children and grandchildren to spread intergenerational wealth and mitigate tax liabilities.
Doing so passes ownership of assets to the trust, rather than yourself, which means that they don’t technically belong to you. As a result, they (usually) aren’t counted towards your inheritance tax liability.
Investing tax-efficiently can mean you avoid any form of inheritance tax, too, but only when your investments meet certain requirements.
Another popular tax mitigation tactic is to get a Will written up that explicitly states what belongs to you, which guarantees that nothing goes to the taxman instead of your loved ones.
Then, there’s your pension death benefits. The nominee (the person who receives your pension after you pass) can be anybody, not just a spouse, and certain pension death benefits are free from IHT.
Each of these options can become incredibly complex, so it’s best to speak to a financial advisor about them before committing.
Summary
There are plenty of ways to mitigate tax liabilities when it comes to intergenerational wealth planning, but it takes the advice of an expert to navigate them effectively.
For more information about reducing your IHT and maximising your intergenerational wealth, get in touch.