Passing Assets Efficiently To The Next Generation

Passing Assets Efficiently To The Next Generation

What will your legacy look like?

Passing assets efficiently to the next generation is on people’s minds as a result of the coronavirus (COVID-19) outbreak. Nobody wants to think of their hard-earned money being squandered when they pass away. Organizing your funds ahead of time will benefit those who will be left behind when you pass away.

Passing assets efficiently to the next generation is ultimately about securing more of your wealth for your loved ones and planning for what will happen after you die to make life easier for them. It’s not pleasant to consider, but it means that your loved ones will be able to carry out your wishes while also being protected from Inheritance Tax (IHT).

Spending your lifetime accumulating wealth

If you don’t make the proper financial preparations, your family may be stuck with a large IHT payment if you pass away prematurely. For many people who have spent a lifetime acquiring a fortune, passing assets on to the next generation is a top priority. Providing finances for family members or a charitable cause is another option to reap the benefits of your riches while still living and leaving a legacy. IHT is the amount of tax due on a person’s estate after they pass away. The government determines the value of a person’s estate after they die, which comprises all assets, including real estate, less any debts.

The Nil-Rate band

On death, there is a 40% tax rate, and on lifetime transfers, there is a 20% tax rate. The first £325,000 charged to IHT in 2021/22 is zero percent, known as the ‘nil-rate band.‘ Since 2009, the nil-rate band has been locked at £325,000, and it will remain so until April 5, 2026. For deaths on or after April 6, 2017, where an interest in a qualifying residence passes to direct descendants, a new nil-rate band is introduced. The relief will be phased in over four years, with the sum set at £175,000 for 2021/22. The relief is virtually doubled for many married couples and registered civil partnerships, because each person has a primary nil-rate band, they may also benefit from the home nil-rate band.

Potentially complex calculations

The residence nil-rate band can only be applied to one residential property, which does not have to be the main family home but must have been a residence of the deceased at some point in the past. Estates worth more than £2 million (before reliefs) are subject to restrictions. A person’s estate will not be eligible for the relief if they died before April 6, 2017. If the spouse who died first has not utilised, or was not entitled to use, their full residence nil-rate band, the surviving spouse may be entitled to an increase in the residence nil-rate band.

Inheritance Tax is payable on everything you have of value when you die, including:

  • Any property or land (even if they are overseas)
  • Businesses you own
  • Savings and investments, including pensions, shares, cash in the bank
  • Trusts
  • Jewelry
  • Works of art
  • Proceeds from life assurance policies not written in an appropriate trust
  • Vehicles
  • Any other properties or land – even if they are overseas

It’s good to give

There are a few options for lowering the amount of IHT you pay, making it easier when passing assets efficiently to the next generation . HM Revenue & Customs (HMRC) allows you to give a number of minor gifts without incurring an IHT charge each year. Because each spouse or registered civil partner gets their own allowance, the total can be quadrupled if both spouses or registered civil partners spend theirs.

Larger gifts are also possible, although these are referred to as ‘Potentially Exempt Transfers’ (PETs) If you die within seven years of making them, you may have to pay IHT on their value. Any other gifts you make throughout your lifetime that do not qualify as a PET will be subject to Inheritance Tax right away. A contribution into a discretionary trust is an example of what are known as “Chargeable Lifetime Transfers” (CLTs).

CLT taxation rules are intricate, so if you’re considering one, you should seek professional financial counsel. Also, if you give someone a present but retain an interest in it, it is known as a “Gift With Reservation” and will be included in your estate for IHT reasons after you die.

HMRC permits you give the following as exempt transfers:

  • Up to £3,000 each year as either one or a number of gifts. If you don’t use it all up one year, you can carry the remainder over to the next tax year. A tax year runs from 6 April one year to 5 April in the next year
  • Gifts of up to £250 to any number of other people – but not those who received all or part of the £3,000
  • Any amount from income that is given on a regular basis, provided it doesn’t reduce your standard of living. These are known as gifts made as ‘normal expenditure out of income’
  • If your child is getting married, you can gift them £5,000; if a grandchild or more distant descendent is getting married, you can gift them £2,500; and to a friend or anyone else you know, you can gift £1,000
  • Donations to charity, political parties, universities and certain other bodies recognised by HMRC
  • Maintenance payments to spouses (and ex-spouses), elderly or infirm dependent relatives, and children under 18 or in fulltime education
  • There are certain other gifts that can qualify for relief from IHT. These can include gifts of a small business, sole trader enterprise or partnership and shares in companies listed on the smaller, riskier stock exchange, the Alternative Investment Market (AIM)
  • Farmers can also gain up to 100% relief from IHT when making gifts of certain agricultural land or farm buildings. But the rules in both these situations are complex and you’d be best to seek expert advice before gifting anything away
  • Members of the armed forces killed in action or whose death is hastened by injuries sustained on active duty are also exempt from IHT

Life Insurance Policies

If you don’t want to give your assets away while you’re still living, another alternative is to buy life insurance, which can pay out an amount equal to your expected IHT liability when you die.
Taking up a life insurance policy and having it written under a proper trust could be used to pay off any IHT debt.

In most cases, the proceeds from a life insurance policy will be considered part of your legal estate and hence liable to IHT. The profits from a life insurance policy can be distributed directly to the beneficiaries rather than to your legal estate, and thus will not be taken into account when IHT is calculated if the policy is written in an appropriate trust. It also implies that payments to your beneficiaries may be made more quickly because the funds will not be subject to probate.

It’s best to seek advice

Passing assets efficiently to the next generation can be a tough task and there is no ‘one size fits all solution’ for planning this. Appropriate succession planning involves a range of planning options & every situation is unique with a specific solution or product. If you would like to review your situation or discuss the options available, please contact us for further information – we look forward to hearing from you.

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True Advice Financial Services is a trading style of TA and SE Hollom Ltd. Which is an Appointed Representative of New Leaf Distribution Ltd. Which is authorised and regulated by the Financial Conduct Authority : Number 460421.

Registered Office : New Leaf Distribution Limited, 165 – 167 High Street, Rayleigh, Essex, SS6 7QA