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Who should I gift my wealth to and when?

Should all your children be treated equally? Who gets your money if you don’t have immediate family? Should your wealth skip a generation? Will children or grandchildren be better off in life if they have to build their own futures? When is the best time to gift money?

Passing on wealth can often be a highly emotive topic. If you have children who are financially adept but others that struggle to cope with money, do you treat them equally? When you’ve built your own wealth from the ground up, do you take the view that your children should make their own way in life rather than be given a comfortable start? Today the advantages of booming property prices, jobs for life and generous pensions enjoyed by the baby boomer generation are harder to come by for younger generations. In fact, industry research shows as many as one in five are relying on an inheritance to get them on the property ladder. When it comes to deciding how to transfer wealth across generations there’s no magic formula, but getting professional advice will help bring both a neutral perspective, and ensure you pass on your wealth in the most tax-efficient way.

Plan early

Keep your wealth in the family.

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Based on their parents' life expectancies, we estimate that the most common age at which today’s 20-35 year olds inherit will be at 61.

The Million Dollar Be-question, Resolution Foundation, Dec 2017

Things to consider when passing on your wealth

Can I afford to gift my wealth early?

Should my wealth skip a generation?

Should we treat our children equally?

How much can I gift to my family & friends?

Do you want to control how your inheritance is spent?

Can I afford to gift my wealth early?

Whilst the question being posed won’t concern the one in four of us who plan to spend their money rather than leave it to their children*, for the majority it’s a crucial consideration. If you retire in your late fifties or early sixties, it’s quite conceivable you could live another 40 years. So, before you start making decisions about gifting and inheritance, you need to ask yourself the following question. Do you have sufficient capital to live comfortably for the rest of your days, including the potential cost of long-term care?

 

To answer this question you may need a Financial Planner to help you calculate your projected outgoings and income. And, if it transpires you do have enough capital, it then raises the question of how best to gift that money to your beneficiaries. At Investec Wealth & Investment we can guide you through these questions and ensure you pass on your wealth in the most tax-efficient way.

 

*Saga Personal Finance, 2015

 

Should my wealth skip a generation?

As our life expectancy has increased, so, too, has the age at which people are inheriting wealth. The next generation are now likely to be sixty-one when they inherit any money*. It’s reasonable to assume that many people at this age are no longer having to shoulder the burden of a large mortgage or the exorbitant costs of private school fees. Recognising this fact, you may feel the inheritance you leave will come too late in life to benefit the generation below and could be put to better use by helping support a younger generation. Which is why it’s becoming increasingly common for wealth to skip a generation to help grandchildren, nieces and nephews to get the best start in life.

 

Alternatively, and provided you have the surplus money to do so, it can make financial sense to make gifts to your more immediate family much earlier than waiting for it to pass to them via your estate. Not only will they benefit when they need it most, during the expensive decades of building their own futures, it can also be highly tax-efficient from an Inheritance Tax perspective, provided you live for seven years or more after gifting your money.

 

 

*Saga Personal Finance, 2015

Should we treat our children equally?

Deciding who, when and how much each of your children should inherit can be an emotive and complex subject. At the heart of this is the fundamental question as to whether you and your partner agree on how to support your children, especially if one is more financially astute than another. Complicating this further, are the issues that can arise from blended families. Such a family structure can create complex financial planning issues which, left unresolved, can leave children unfairly locked out from receiving an inheritance.

 

Some clients will take the straightforward view that each child should get an equal share. Others will adjust their inheritance according to how they view the different needs of each child and some will feel their money will best be managed by setting up trusts that ensure a degree of control over how, and when, the money is used. Whatever your needs and views, at Investec we’re happy to be an impartial sounding board and, more importantly, once you decide how to proceed, we will ensure that your wealth is transferred in the most tax-efficient way.

How much can I gift to my family & friends?

There are numerous ways you can give away money that will be immediately exempt from Inheritance Tax. Each year you can give away £3,000 to anyone you choose and use any unused allowance from the previous year. You can make small gifts of up to £250 provided it’s not to the same people you’ve gifted your annual exemption of £3,000.

 

You can gift your children and grandchildren £5,000 and £2,500 respectively when they get married. You can also donate as much as you like to charities, universities, museums, and some political parties and you could even set up your own charitable trust. Whatever options you choose, it’s important to keep an accurate record of your gifts, as your executors will need to share this information with HMRC.

Do you want to control how your inheritance is spent?

None of us like to think the wealth we’ve accumulated might be quickly frittered away. Trusts can be an effective and tax-efficient way to pass on your money, especially if you feel your beneficiaries are too young, too irresponsible to use it wisely, or you feel the money could end up in the wrong hands. Discretionary and absolute trusts are the most common types of trust.

 

Absolute or bare trusts, as they are often known, are relatively simple and typically set up for children who become entitled to the trust’s assets once they reach the age of eighteen.

 

Discretionary trusts give you, or the trustees, control over how the money is invested and how and when beneficiaries can use or access the money. This type of trust usually ensures the money in the trust is protected in the event the beneficiary is subsequently divorced or made bankrupt. Trusts are quite complex and can be costly to administer, so it pays to get advice to understand if they could be a pragmatic way to control how you pass on your wealth.

Want to discuss Inheritance Tax Planning?

Get in touch with your local Investec office today.

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In the wider field of world finance and its risks, I have come to rely on Investec’s formal guidance along the way.

Gillian Reynolds CBE

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