Do you intend to pass on wealth to loved ones? If you want to help children and grandchildren become more financially secure, you need to consider more than just the sum you’ll be giving them. Tax rules may mean you need to think carefully about how you do so, as well as the impact it will have on you.

If you want to pass on a portion of your wealth to loved ones, you essentially have two options: do it during your lifetime or as an inheritance.

There are pros and cons to both these options. Passing on your wealth now means you get to see the impact the money has and, depending on the circumstances of your loved ones, it may have a bigger positive effect on their life. However, on the other hand, it may diminish their inheritance and you’ll need to think carefully about how it affects your wealth over the long term.

Whatever option you choose, efficiency should be considered. After all, you want as much of your gift as possible to go to your loved ones.

1. Use your gifting allowance

When you give a gift, you may think it’s considered out of your estate for Inheritance Tax purposes. However, this isn’t always the case. Some gifts may still be considered part of your estate for up to seven years and could be liable for tax as a result.

Crucially, there are some exemptions that mean gifts are immediately outside of your estate for Inheritance Tax purposes. This includes the annual gifting allowance of £3,000. If you want to give money to loved ones now, you should make use of this. It can be carried forward by a year, so if you didn’t use your allowance last tax year, you could efficiently give £6,000 this year.

2. Write a will

If you’re hoping to leave an inheritance to your loved ones, writing a will should be the first thing you do. Even if you already have a will in place, it may be worth reviewing it.

Having a valid will is the only way to ensure that your wishes are carried out. Despite this, more than half of British adults have not made a will. Not doing so would mean your assets are distributed according to Intestate Rules, which could be vastly different from your wishes. A will may also present an opportunity to mitigate tax.

Ideally, you should review your will every five years and after big life events, such as new grandchildren arriving, marriage or divorce.

3. Use a trust

Another way to potentially take a portion of your wealth out of your estate is through using a trust. A trust can allow you to pass on assets or money to beneficiaries with one or more people, or even a company taking control. It’s an arrangement that can be particularly useful if you want to pass gifts on to children or vulnerable people.

There are several different types of trust and some are subject to their own tax regimes, so you need to fully explore your options before deciding to set up a trust.

Trusts can be complicated and once you’ve made a decision, it may be irreversible. As a result, it’s important that you seek both financial and legal advice before proceeding. Please contact us to discuss if using a trust is an option that is appropriate for you.

4. Remember your pension

Pensions can provide you with an income throughout retirement. But they may also present you with a chance to pass wealth to loved ones after you’ve passed away.

Money taken out of your pension will be considered part of your estate and, therefore, potentially liable for Inheritance Tax. However, money that remains in your pension can be passed on efficiently.

If you die before the age of 75, the money within your pension will not be taxed at all if it’s accessed within two years. After the age of 75, your beneficiary will be charged Income Tax, which could be far less than Inheritance Tax depending on their personal income.

If you want to leave your pension to a loved one, it’s important to note your pension doesn’t form part of your estate. As a result, it won’t be covered by your will. You should contact your pension provider to complete an ‘expression of wishes’ to let them know what you’d like to happen.

These four ways to pass money on efficiently aren’t the only options. Depending on your circumstances and goals, there may be other options that are more suitable. Please contact us to discuss your personal needs.

What impact will the gift have on you?

Whilst passing on wealth, tax efficiency is important, it’s also crucial that you measure the impact it could have on your plans and future. For instance, would taking a lump sum out of your wealth now to give as a gift potentially leave you financially vulnerable in later years? Would a planned inheritance be at risk if you were to need long-term care?

You can’t know what’s around the corner but by making gifting part of your financial plan, you can help ensure everything stays on track. Please contact us to discuss how you’d like to financially support loved ones. We’ll help build a financial plan that reflects this, as well as your other goals.

Please note: The Financial Conduct Authority (FCA) does not regulate will writing, estate or tax planning.

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