The intergenerational wealth transfer – how to plan for it

There comes a time in our lives when we turn our thoughts to what we want to leave behind for our loved ones. The Kings Court Trust estimates that more than £5 trillion will be passed down over the next 20-30 years. Unfortunately, HMRC can become the largest benefactor. In 2019/20, HMRC collected over £5.2 billion in Inheritance Tax (IHT) receipts, and it is likely that more estates will now be subject to IHT as properties continue to increase in value, and investments and cash savings build up. In fact, the Office for Budget Responsibility predicts that IHT receipts will exceed £6 billion per annum by 2023.

Thankfully, all is not lost. There are a variety of different financial planning options to consider in order to potentially mitigate some or all of this liability.  

Firstly, establishing a will ensures that your estate is distributed in accordance with your wishes. If you have one in place already, it is worth reviewing this every two to three years. 

It is also worthwhile reviewing the available gift allowances. As a reminder, you can gift up to £3,000 each tax year to whomever you wish and, if the previous tax years’ annual gift allowance is unused, this can be carried forward. There are also certain gift allowances for marriages/ civil partnerships, and you can also make recurring, or habitual, gifts out of excess income to family or friends providing that it does not impact your current standard of living. 

Whilst these are useful allowances, they may not be sufficient alone to reduce larger IHT liabilities: 

1. Life cover written into trust could be one valuable option. The main benefit of writing life cover into trust is that the lump sum payment falls outside of your estate for IHT purposes and is usually paid out quickly. However, some see this as ‘pre-funding’ the IHT liability and you would need to consider the affordability of the ongoing premiums. 

2. Making large outright gifts could be suitable if affordable, but they do run the risk of being caught by HMRC. Gifts to individuals are known as ‘Potentially Exempt Transfers’ and only fall outside your estate if you survive seven years. If you do not, the value of the initial gift is brought back into your estate for IHT purposes, with any potential IHT liability on the gift payable by the recipient(s). Whilst outright gifts do have their place in IHT planning, speaking with a Financial Planner is advised before considering this option to ensure it is planned correctly.

3. If you are comfortable making an outright gift but would prefer to retain some control over how the capital is invested and distributed to your intended beneficiaries, you may wish to consider a trust arrangement. Whilst trusts do require ongoing monitoring and administration by the trustees and, admittedly, can have rather complex tax structures, they provide bloodline protection for your loved ones and would fall outside of your estate either immediately, or after seven years (depending on the type of trust chosen). The trustees control how the assets are managed and distributed, which can help reduce the worries over money being spent unwisely if gifted directly. Furthermore, some trust structures can even cater for future children/ grandchildren, with the assets exempt in the event of bankruptcy or divorce. 

4. Lastly, should you prefer to retain full control of your hard-earned money, you could consider investing into certain AIM-listed or unquoted companies. Here, you would have the right to sell the investment should you need to access the capital (i.e. to pay for care fees or any unforeseen expenditure) and may even be able to generate a positive real return. This is a relatively simple option with no complex legal structures that aim to fall outside of your estate after just two years, as opposed to seven. However, your capital would be at risk and it may fall in value. 

With IHT planning there is no ‘one size fits all’ solution. It very much depends on your personal circumstances and objectives, and may involve a mixture of the aforementioned options. IHT planning, ideally, requires periodic ‘sense checks’ to ensure that the arrangements remain suitable. This is particularly pertinent given that the winds of change continue to circulate the Inheritance Tax sphere, especially with the large level of debt hanging over the government finances as a result of its response to the Covid-19 pandemic. 

Talking to a financial adviser about your situation can make a real difference and if you are to take anything away from this article, I hope that it is this; the earlier plans are put in place, the better.

Cave & Sons Ltd is authorised and regulated by the Financial Conduct Authority (FCA), Financial Services Register number 143715.

This communication is for general information only and is not intended to be individual product/investment advice, tax or legal advice. The views expressed in this article are those of Cave & Sons and should not be considered as advice or a recommendation to buy, sell or hold a particular investment or product. You are recommended to seek professional regulated advice before taking any action.