We understand how important it is for your wealth to be passed onto the people you love, at the right time, as tax efficiently as possible.

Financial Planner, Chris Brown shares some of the measures you can put in place to avoid putting the money, intended for your family, into jeopardy.

It is estimated that in the next 20 to 30 years, the ‘great wealth transfer’ will occur. This is when around £5.5 trillion will be transferred between the generations as either inheritance or gifts. At the same time, we are seeing increased levels of revenue generated by the Treasury from inheritance tax receipts.

The Chancellor’s tax strategies announced in the 2022 Autumn Statement saw the inheritance tax nil rate band of £325,000 and the residence nil rate band of £175,000, frozen until at least April 2028. This will bring more families into the scope of inheritance tax and increase the amount of inheritance tax that families must pay.

The Office for Budget Responsibility estimates that in the next five to six years one in 15 people will be paying inheritance tax on their estates, pulling in around £45 billion in inheritance tax over the period. These figures alone point to the need for effective estate planning if we are to pass on more of our wealth to our beneficiaries rather than to the taxman.

Concerns around inheritance taxation is one reason why more people are looking for independent financial advice. Most people want to know that when they pass on their wealth it will be done in a controlled way and used sensibly. They want to know that when they pass on their wealth to the next and possibly future generations, it will be done tax efficiently so their beneficiaries won’t be subject to an unnecessary tax bill. And they also want to know that the younger generations have the support they need to manage the family wealth.

Attitudes to money

Differences in attitude to money is an area which affects decisions around wealth transfer. Recent research from abrdn, among those aged 55 to 73, found they were less likely to pass their wealth to someone if they felt they had a different attitude to money than themselves.

Unsurprisingly, they wanted to know that the wealth they had accumulated in their lifetime, would be well looked after and managed for the benefit of the next and potentially, future generation(s) too.

If we consider that at different points in our lives, we will have different financial concerns, it makes sense that the generations may differ in their view on money. They are likely also to be facing different challenges. Those in retirement usually will have paid off their mortgage and may have a final salary (defined benefit) pension. Millennials, on the other hand could be focused on getting on to the property ladder rather than saving for the future. This is where Lowes can help by working with families to help pass on their financial values and for the next generation to build strong financial foundations.

Practical ways to pass on wealth

It is important that discussions take place around tax and estate planning. We do not want to see families stray into paying inheritance tax which a good financial plan could have avoided.

There are several tax efficient ways to pass on our wealth but all of them require planning ahead of time. Gifting is a useful tool for those whose estate will breach the £325,000 nil rate band. We can gift money throughout our lifetime, and it will pass out of our estate for inheritance tax purposes after seven years. These gifts are known as potentially exempt transfers (PET). They are ‘potentially exempt’ because if the benefactor dies within the seven years, then the value of the gift will fall within the person’s estate for IHT purposes, which could mean tax bills for those receiving the gift. There is a sliding scale applied which reduces the tax, where payable, from year three. Known as taper relief, this reduces the 40% tax rate to 32% in years three to four, and thereafter to 24%, 16% and finally to 8% in years six to seven, before passing out of the estate altogether.

There are also annual allowances for gifts. These can be made in assets or cash, up to £3,000 a year in total, free of inheritance tax; on marriage – parents and grandparents can gift £5,000 and £2,500 respectively, plus £1,000 to others; and as gifts from normal expenditure out of income (i.e. ‘surplus’ taxable income) – up to £250 per person.

Gifting allowances have not increased with inflation, and so have declined in value over the years, but it is worth maxing out these allowances before making other gifts.

What needs to be considered in all these cases is that once assets or money are gifted, the money passes out of the donor’s control. This might not be desirable if the donor then needed the money in later life or the money became part of a beneficiary’s divorce settlement. So, we advise anyone considering gifting money or assets, particularly of a substantial amount, to undertake a proper assessment of their wealth and needs – including financial provision for the future, such as for long term care.

We can use cashflow forecasting to show how long a pension pot and investments might last given foreseeable expenditure over the years. This can be particularly sensible for anyone in retirement who may not be able to top up their retirement pot, factoring in that costs may rise through inflation.

Trusts can be invaluable when estate planning and passing on wealth to younger generations. In particular, they can address concerns around attitudes to wealth and retaining a degree of control of the money. A trust allows for wealth to be held for a named individual or individuals, but the person making the payment, the settlor, can receive payments from the Trust should they need it.

Assets, such as property, can also be given away but they are subject to the seven year rule and importantly, they must pass outside of a person’s control or use to fall outside of the estate.

Pensions are another tax efficient way to pass on wealth. Since 2015 when the Pensions Freedoms rules came in, flexible pensions can be passed on free of tax to beneficiaries on death of the pension holder if that occurs before age 75. After that age, the beneficiary pays income tax at their marginal rate of tax when money is withdrawn.

While we have only touched on some of the ways we help families with intergenerational wealth transfer and estate planning, these are core services we offer our clients. Lowes advisers can also help support those inheriting wealth to manage it and find the best financial products and investments to help meet their own financial needs.