How to ensure you pass on wealth to the next generation

Wealth is increasingly becoming an intergenerational issue. Parents nowadays are frequently saving to help their children get on the property ladder, and grandparents may find themselves providing financial assistance to young families. As a result, it’s critical to consider when and how you’ll pass money down to the following generation when the time comes.

1. Use your pension

Your pension is intended to provide you with an income in retirement, but if you have other sources of income, you may want to explore utilising your pension to pass wealth on to the next generation tax-efficiently.

When you withdraw money from your pension, it becomes part of your estate for Inheritance Tax (IHT) reasons. Unused pension funds, on the other hand, do not.

By taking a reasonable amount from your pension, you may be able to leave an unused pension pool to the following generation. If you have extra money coming in, such as through financial investments or a Buy to Let property, you can consider not receiving your pension at all. At the very least, you should consider collecting your pension only when absolutely necessary.

In some situations, you may be able to pass on 100% of your unused pension pool to the following generation. If you die before the age of 75, any unused pension assets can be handed on to a designated recipient tax-free. If you die beyond the age of 75, your beneficiary will be subject to Income Tax at their marginal rate, which may be less than the IHT they would have paid. It’s important to note that your beneficiary is picked by your pension provider rather than through your will. Contact your provider to see if you already have a beneficiary registered and, if not, to add one.

2. HMRC gifting rules

You can make tax-free gifts over your lifetime according to HMRC giving laws and exemptions. The three primary exceptions are as follows:

  • Gifts up to £250

During a single tax year, you can make minor gifts of up to £250 per individual. This might be used to cover birthday or Christmas gifts.

You can also make limitless tax-free presents to your spouse or civil partner. Gifts must be made during your lifetime, and your partner must be a permanent resident of the United Kingdom.

  • Exempted gifts

The ‘annual exemption’ permits you to make a gift of up to £3,000 within a single tax year without the worth of your estate being included for IHT purposes.

The allowance is per person and can be carried over for one year. This implies that a couple can give up to £6,000 in a single tax year, with the amount increasing to £12,000 if neither party utilised their yearly exemption in the preceding tax year.

  • Normal expenditure out of income

Regular donations can be made utilising the standard expenditure out of income exemption. Most donations are tax-free as long as they are made on a regular basis and do not have a negative impact on your way of living.

This exemption might be used to pay life insurance premiums, pension payments for a family member, or monthly contributions to a trust.

HMRC will check to see if their criteria are met, so bear them in mind. For example, if you make recurring annual payments into a trust for a loved one, make only one payment every tax year. Two payments in one tax year followed by none the following year may not meet HMRC’s “regular payment” criterion.

3. Using a trust

Putting money in a trust removes it from your estate for Inheritance Tax reasons.

A trust is a legal framework that allows you to bequeath assets to certain beneficiaries. The trust is then administered by trustees until it is distributed to the beneficiaries, either after your death or at a later period specified by you.

A trust, in addition to providing IHT advantages, provides you control over your assets and allows your loved ones to access funds more quickly after you die.

There are several sorts of trust, and they are legally binding instruments that might be complicated. It may be beneficial to discuss this with a financial adviser, such as one of our team at Veracity Financial Planning, to ensure you understand the legality of the trusts and make informed financial decisions.


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Woody Snapper

Woody works with individuals and business' looking for corporate finance, high net worth mortgages, complex loans, bridging loans and development finance.

To contact Woody.

Tel: 07922 413586