The phenomenon known as the Great Wealth Transfer means younger generations are set to inherit large sums of money over the coming decades. With people living longer, it’s becoming more and more common for people in their 50s and 60s to come into an inheritance from elderly relatives. This can cause unexpected estate planning problems.
A married couple combining available allowances may enjoy an inheritance-tax (IHT) free threshold of £1,000,000. But many homeowners in the south east will already be close to – or surpass this figure – based on high property values. Assets above the available allowance are taxed at a punitive 40% when settling an estate.
Older beneficiaries
Adults in their 40s and 50s are likely to have less need of a windfall than younger people in their 20s or 30s. By this stage, an individual will typically have fewer outstanding liabilities, be earning a good salary, and be planning their retirement. Often children will have moved out, and mortgage debt will be low, or paid off entirely. If you have already built up substantial assets (including your main home) then inheriting a large sum could cause estate planning problems.
Gifting strategy
If you’re facing an IHT liability due to inherited money there are various mitigating actions you can take. A gifting strategy is one common method that families use to reduce or negate an IHT issue. For example, a portion could be gifted to children, providing them with a leg up to buy property, or pay off a mortgage.
Gifts above £3,000 are usually exempt from forming part of your estate for IHT purposes if you (the donor) survive for seven years. There is no limit to the size of gifts that can be made, but you may face an IHT charge if you pass away within seven years of making the gift. Death after 3–7 years sees a reduced IHT charge apply on a sliding scale, known as ‘taper relief’.
Tax-efficient investing via pensions
Other segments could be put towards private pensions. As well as contributions benefitting from generous tax relief, pensions are particularly helpful from an estate planning perspective, as they can typically be passed on to beneficiaries without an IHT charge applying.
Most people can contribute up to £60,000 a year (except for certain higher earners), but paying in up to £200,000 may be possible by ‘carrying forward’ unused annual allowances from the prior three tax years. This can give your retirement pot a valuable – and IHT-efficient – boost.
Robust estate planning can help all generations of a family manage a potential inheritance tax liability. Early planning is advised. Call 03300 564 446 to learn more, or get in touch via our contact form.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
