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Inheritance planning: How to pass down wealth to younger generations and save on the tax bill

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Nearly nine in 10 parents plan leave money to children or grandchildren in their will – but less than half have actually written one. By Vicky Shaw.

Many parents and grandparents have ideas about how they would like to pass wealth down the generations. Yet around six in 10 (59%) do not currently have a will, according to new research by LV=.

While nearly nine in 10 parents (88%) plan to leave money to their children or grandchildren in their will, only 41% have actually written one, the pensions and retirement specialist found.

Wealthier or ‘mass affluent’ people (those with assets of £100,000 and £500,000 excluding property) are more likely to have their affairs in place to pass on an inheritance, according to the Wealth and Wellbeing Monitor – a quarterly survey of 4,000-plus UK adults.

When it comes to mass affluent parents, more than half (51%) already have a will in place, and a fifth (20%) have put money into an investment for their children or grandchildren, compared with one in eight (12%) of all parents across the survey. Nearly a fifth (17%) of wealthier parents had also spoken to a financial adviser about the best way to pass on wealth.

What happens if you don’t do the prep?

Failing to write a will or complete estate planning can potentially lead to unexpected inheritance tax (IHT) bills being levied on someone’s estate when they die. There’s normally no inheritance tax to pay if the value of someone’s estate is below the £325,000 threshold, or everything above the £325,000 threshold is left to their spouse, civil partner, a charity or a community amateur sports club.

Clive Bolton, managing director of protection, savings and retirement at LV= says: “Although people recognise the financial benefits of doing things like writing a will, it is striking that only a minority have taken action to do so. Estate planning can save a people a huge amount of tax and ensure your family receive a financial legacy you want them to have.”

Here are LV=’s tips for passing on wealth…

1. You could use allowances to give tax-free gifts

Someone can potentially give away a total of £3,000 worth of gifts each tax year without them being added to the value of their estate. This is known as their ‘annual exemption’. The £3,000 can go to one person or be split between several people.

It is also possible to carry any unused annual exemption forward to the next tax year – but only for one tax year. The current tax year will end soon. The tax year runs from April 6 to April 5 each year. If you die within seven years of giving a gift and there is inheritance tax to pay, the amount of tax due depends on when you gave it.

LV= also suggests that if someone has more income than they need to maintain their normal standard of living and they regularly gift the excess income to help support someone else financially, these gifts could fall under a ‘normal expenditure out of income’ inheritance tax exemption. LV= suggests seeking professional advice though if someone is looking to rely on this exemption, to ensure the gifted income qualifies.

2. Consider life insurance to cover the tax bill

If someone’s estate is likely to pay inheritance tax, LV= suggests they could consider taking out a whole of life insurance policy placed in trust that will cover the tax bill.

Alternatively, if someone is gifting assets which should eventually bring their estate below the inheritance tax threshold, there may be other insurance policies which are more appropriate.

3. Would a trust be appropriate?

If someone is not ready to make outright gifts, LV= says trusts may allow them to keep control over who will benefit and when. It adds that financial advice tends to be needed when using trusts.

4. Help to boost younger generations’ savings pots

Parents and grandparents can contribute to a child’s Junior Isa, which can be unlocked when they turn 18. If the child or grandchild is aged between 18-40 and trying to save up to get on the property ladder, helping them save into a Lifetime Isa (Lisa) can be beneficial. The UK Government will add a 25% bonus to deposits of up to £4,000 a year.

5. Consider starting a pension for children and grandchildren

Although most people won’t set up a pension until they reach working age, a pension can be started as soon as someone is born. In addition, contributions made by a parent or grandparent, which can be made directly to the plan as ‘third party contributions’, can be treated for tax relief purposes as if they were made by the beneficiary themselves.

Although pension contributions can be one of the more tax efficient ways to gift money to a child or grandchild, LV= cautions that the money is likely to be inaccessible until the child nears retirement.

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