3 powerful reasons intergenerational planning is vital for your family’s wealth

According to FTAdviser, in the next 30 years around £5.5 trillion will be passed to younger generations in Britain through inheritance. It’s been called “the greatest wealth transfer in UK history”.

Despite this, a recent study by Schroders Personal Wealth reveals that 80% of families don’t have a strategy for passing wealth to loved ones. If you’re one of them, you may not realise that a strategy could allow you to leave more money and reduce the chances of paying unnecessary Inheritance Tax (IHT).

So, if you’re wondering: “how can I reduce my Inheritance Tax liability?”, read on to discover how an intergenerational wealth strategy and financial planner could help. Before you do though, we need to look at how IHT works.

It’s the tax on your worldly belongings when you die

As IHT is typically charged at 40% it could significantly reduce the amount you leave to beneficiaries when you die. That said, it’s not all bad news, as the government allows you to have an amount in your estate on death that is not liable to IHT.

Known as the “nil-rate band” (NRB), in 2021/22 you could have £325,000 as an individual and £650,000 if you’re married. If you’re also entitled to the residence nil-rate band (RNRB), you could have up to £1 million in your estate before the tax is due, but this depends on your circumstances.

Always speak to a financial planner to confirm how much you could have in your estate before IHT is due. In March 2021, the chancellor froze the NRB and RNRB thresholds until 2026, so if your property and investments continue to rise in value during this period, you may face a higher IHT liability.

Reducing your wealth could reduce your IHT liability

If you have wealth above your threshold, it’s typically going to be liable to IHT. By reducing the value of your estate, you should reduce the amount of tax your estate will be charged. In fact, if you decrease your estate down to within your threshold you will normally not be liable to IHT.

One way you could do this is by using several gifts the government allows you to make every tax year. For example, in 2021/22, you could gift £3,000 to an individual or split the amount between many beneficiaries.

A financial planner can explain all the gifts you may make, and which ones may be right for you.

You could use a potentially exempt transfer (PET)

If you have a substantial amount above your threshold that is likely to be liable to IHT, you may want to consider a PET. This allows you to gift any amount to as many people as you want.

The only stipulation is that you must live for seven years after making the gift for it to fall outside your estate and not be liable to the tax. If you don’t survive seven years, the gift could be liable to a sliding scale of IHT depending on how long you’re alive for.

Creating an intergenerational wealth strategy could help

So, if you are wondering “how can I pay less Inheritance Tax?”, you’ll probably be pleased to learn that an intergenerational wealth strategy could help. This is a strategy you develop that helps you plan the best way to pass your wealth to beneficiaries, taking into consideration:

  • IHT
  • The gifts you could make
  • Your future financial security
  • Any tax implications.

Starting your strategy as soon as possible is critical for the following three reasons.

It could provide more time

If you start your strategy as early as possible, it could provide more time to reduce the value of your estate to within the NRB threshold. For example, if you start your strategy aged 65 and use a PET, you’re more likely to survive for seven years than if you’re 85 when you do it.

You could also use the annual gifts the government allows you to make for more years, helping you reduce your estate further.

Provide money when your family needs it more

Gifting when you and your family members are younger could mean the money has more value when they receive it.

Leaving money when you die could mean you pass it to loved ones when they’re already financially secure. If, instead, you give money when they’re younger, and potentially trying to support a young family while paying a mortgage, your money could be much more helpful to them.

Give you more control

Gifting while alive means you can have a say about how your wealth is used. For example, if you want it to help your grandchildren buy a first home, but are worried they’ll instead buy a sports car, you can take action.

By talking to them, or setting up a legal trust, you could ensure they understand how you would like it to be used, and create a legal framework to ensure that’s what they do. Gifting while you’re alive could also stop arguments within the family when you die, as they will be clear about who receives what and why.

Remember to back your wishes up with a bona fide will. And, as trusts can have complex tax rules, always speak with a financial planner to ensure they are right for you.

Get in touch

If you are asking yourself: “do I have an IHT liability?” and would like to discuss how you might reduce it, please contact me. My email is a.douglass@grosvenorconsultancy.co.uk or call my office on 01793 766 123. Alternatively, call my mobile on 07525 177 046.

While I offer high standards of service and will work with you to ensure any plan is right for you, I’m also a busy mum, so work Mondays and Tuesdays only.

Please note:

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

Leave a Reply

Your email address will not be published. Required fields are marked *