Seven steps to take when you’re passing on wealth to loved ones

If you’re in a position to support loved ones financially, it can be difficult to know what to do. How should you go about passing on your wealth, helping to improve their financial security? There is more than one option for you to consider, as well as the impact it could have on your own financial situation.

With younger generations often struggling to secure their financial future, a gift can help them find their feet. However, you need to balance the good it can do for your loved ones with the impact on you and the most efficient way of doing so. If it’s a step you’re planning to take, there are seven key things to do first.

1. Assess your wealth

First, you should assess your entire estate, from investments to property. You might already have a good idea of the value of your assets, but they can change over time. Getting a clear, accurate picture of what you own and how much each individual asset is worth is crucial. It’s a step that can help you see the full range of options open to you and fully understand how supporting loved ones could affect both you and them.

2. Understand the impact gifting could have

With a picture built up of your estate, do you know what impact gifting to loved ones now would have? If, for example, you were to gift a lump sum to each of your children, would it affect your lifestyle? Would you still be able to meet your retirement aspirations? And would you still be able to cover the potential cost of care in the future? Effective financial planning can help you answer these questions and give you the confidence to move forward if you decide it’s the right decision for you.

3. Speak to your loved ones

To get the most out of the estate you’ve built up, inter-generational wealth planning is important for families. Speaking with your beneficiaries is crucial, as is engaging them on financial decisions that could affect them. Understanding the financial challenges your loved ones are facing can help you formulate a plan that suits everyone. Perhaps you plan to leave your estate in your will. But, if your beneficiaries are struggling to get on the property ladder now, a gift while you’re alive could have a far greater impact on their financial security.

4. Get to grips with the gifting rules

While gifting now may suit both you and your loved ones, it’s not always as straightforward as handing over assets. It’s important to get to grips with the gifting rules before you decide. Gifts that aren’t immediately exempt from Inheritance Tax (IHT) are known as Potentially Exempt Transfers (PET). Should you die within seven years of a PET, it may still be liable for IHT.

Gifts that fall immediately outside of your estate for IHT purposes includes gifts up to £3,000 a year, wedding or civil ceremony gifts up to £1,000 per person, rising to £2,500 for grandchildren and £5,000 for children, and gifts that are paid for out of your surplus income, such as Christmas and birthday gifts.

5. Check if your estate may be liable for Inheritance Tax

IHT is the tax paid on an estate, which includes the vast majority of your assets when you die. The Nil-Rate Band means no IHT is due if the value of your estate is below the £325,000 threshold, an allowance that can be passed on to a spouse or civil partner. The Residence Nil-Rate Band can further increase the allowance if you’re leaving your main home to children or grandchildren. It is currently £125,000, rising to £150,000 in 2019/20. The standard IHT rate is 40% and could leave your loved ones with a hefty bill.

Understanding your IHT position can help you plan for the future and ensure as much of your wealth as possible goes to your loved ones. If your estate is liable for IHT, there are steps you can take to reduce the bill, or potentially eliminate it. If you’d like advice on this area, please contact us.

6. Write a will

The most important step to take when planning how your wealth will be distributed after you pass away is to write a will. Despite setting out your wishes, more than half of adults in the UK haven’t gotten around to drawing up their will yet. It gives you an opportunity to clearly dictate who will receive what from your estate. Without a will, your estate would be distributed according to Intestacy Rules, which may be vastly different from what you want. If you’ve discovered your estate could be liable for IHT, a will can help reduce this too.

7. Don’t forget about your pension

If your retirement provisions remain in a pension wrapper when you die, it’s often a tax-efficient way to pass on wealth. Typically, if you die before the age of 75, your beneficiaries will pay no tax on any pension savings left to them. After your 75th birthday pension assets become taxable, but only at the marginal rate of Income Tax. As a result, leaving your pension to loved ones is often more efficient than other means. Rather than naming beneficiaries to receive your pension in your will, you nominate someone to inherit what remains. You can do this by contacting your pension fund.

If you’re planning on transferring some of your wealth to loved ones, we’re here to help you. With our support, we’ll help you understand the impact on your other aspirations and offer advice on the best way to do so.