Some of the Baby Boomer generation are in the happy position of considering how they may pass on their remaining wealth to the next generation on their death.
Baby Boomers (generally defined as born between the mid-1940’s and mid-1960’s) have seen property prices increase by an average of approximately 340% between early 1991 and early 2015. Many have generous final salary pension schemes (or high final salary pension transfer funds of several hundred thousand pounds).
In contrast, their children (Generation X) have not had it so good. Although many did take advantage of the steep climb in house prices to 2015 workplace pensions have generally been less generous. They have endured the Banking bust of 2008 and now live with the uncertainty of the Trump era and Brexit.
So how can those fortunate enough to have sufficient wealth to see them through their retirement and more pass their wealth to the next generation on their death. There are several issues to consider. Tax implications, how much to give, who to give it to and when all need detailed consideration.
Who Should Inherit And When?
For many, the obvious answer is children should inherit. However, Generation X may be in their early to late 50’s and many will be financially secure. The same cannot be said for their children who may be saddled with student debt or facing major problems securing a foothold on the housing ladder.
So should it be the children or grandchildren who inherit? Personal circumstances have a major impact on the decision making process. You may trust your children and grandchildren but (to be blunt) what about their partner? If passing wealth down to grandchildren are they mature enough to handle their new found wealth appropriately.
Sometimes there are difficult questions to be asked and decisions made. Many difficult family situations can be resolved using a Will and/or Trusts (see below)
How Much To Give
How much wealth can you pass on (in a tax-efficient way) without leaving yourself financially exposed? Nobody can predict the future, what your cash demands will be and how fast you may need access to funds. It is important to remember the risk factors that may impact on retirement income.
A retirement plan should factor in some liquidity to ensure you have easy access to funds should the need arise. However, this should be balanced against the tax implications.
Longevity is generally increasing. The longer you survive the more inflation may be a factor. The older you are the higher the chances you will need to pay for care. It is important to ensure you do not run out of money in retirement.
Make A Will
If you have no Will your assets (and tax bill) will be allocated to your relatives according to the intestacy rules. There are several potential traps in the rules and if you want to be sure your wishes are acted upon on your death it is best to have a Will in place.
Trusts can deliver control over how your assets are used by future generations. They can also protect (to an extent) against complex family issues compromising your wishes long after your death.
For example, Trusts may protect your beneficiaries legacy should there be any marital disputes. They may also help ensure beneficiaries use their inheritance wisely. Trusts may also be used to manage Inheritance Tax issues (see below).
It is possible to place up to £325,000 into a Trust every seven years. Assuming you do not die within those seven years period the amount in trust outside of your estate (and therefore IHT free) on your death. Trusts and the tax implications are complex and it is important to take appropriate financial advice.
We have covered the Inheritance Tax rules in detail elsewhere on this blog. It may appear to many the £325,000 limit beyond which IHT applies plus (from 2020) the extra £175,000 allowance for homeowners is generous.
However, with average house prices in areas of the South East, North West and Midlands significantly higher than the allowance IHT can be an issue. What if you were to receive an inheritance? What then?
You may wish to hold a level of cash (or ISA’s) to cover any short-term unexpected expenses or to avoid withdrawals from your investments when markets are down. These are assets included in an IHT calculation and therefore need to be managed appropriately.
Inheritance Tax legislation is complex. There are those who have tried to exploit loopholes in the legislation over the years and many have been closed. It is important to take professional advice rather than make invalid assumptions. A wrong move may leave your beneficiaries with a significant IHT bill that they will need to pay within 6 months of your death.
The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance. This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. Tax regulations can change and any figures quoted above are at the date of publication.