“For those who receive an inheritance, it could well be one of the largest single sums of wealth they ever receive. Financial advice can offer invaluable support and peace of mind when it comes to knowing how best to approach this, particularly when the recipient has specific financial goals in mind. This can also place them in the best possible position to start planning how they might want to support their own dependants further down the line, giving investments made on behalf of their own children time to grow.”
While younger generations may expect to receive an inheritance, they’re less confident about their ability to pass on wealth to dependants themselves; 57% of under 45s (increasing to 59% of under 35s) are worried about how they will afford to pass on an inheritance while maintaining their own standard of living – although noting that more than half (55%) of those under 45 still intend to do so.
Key considerations when passing on wealth
- Inflation erosion – With IHT thresholds frozen, but with inflation likely to rise, more estates are likely to get caught by the 40% IHT tax rate – meaning potential disappointment for ‘Generation Expectation’.
- To gift or not to gift – Gifts up to £3,000 per annum can be made free of IHT. Any gift in excess of £3,000 will become a potentially exempt transfer. It will remain IHT-free if you survive for 7 years after making it. If you die within the 7-year period, the gift will become subject to IHT. It is also worth noting several annual exemptions for gifts; each tax year you can also give away wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child), and £250 per person per year assuming none of the other exemptions have applied to the recipient within that tax year. Anything in excess of these limits is considered a Potentially Exempt Transfer (PET), at which point the 7-year rule will apply.
- Pension potential – Pensions aren’t included when IHT is calculated. Using other assets to fund your retirement means pensions can be passed on tax-free while gradually reducing the size of the taxable estate.
- Surplus sums and regular gifts – Surplus income left to accumulate increases the value of the estate. It could be effectively used to fund children’s pension contributions, mortgage payments or, life insurance or illness cover. Regular gifts from surplus income must be regular, payable from income and not affect the donor’s standard of living to qualify as IHT exempt.
- CGT vs. IHT – IHT is a tax on the value of a deceased’s estate. Capital Gains Tax (CGT) is a tax on profit. Gifting an asset during your lifetime may mean both taxes interact with expensive consequences. Paying CGT now to save IHT later may not make financial sense. If you are planning a large gift, seek advice.
