There are multiple ways to transfer wealth to your family. The best option for you may depend on various factors, such as whether your loved ones need immediate support and how to reduce Inheritance Tax (IHT).
Continue reading to discover what you should consider when passing on assets through three different methods.
1. Gifting during your lifetime
Giving gifts to loved ones during your lifetime is becoming more popular. Since younger generations often face financial difficulties, providing a gift now can offer them greater security compared to receiving an inheritance later in life.
A major advantage of gifting during your lifetime is the ability to support your loved ones when they need it most. This support can help your family get on the property ladder, pursue higher education, or better manage their finances.
Many young people rely on family to reach milestones. Research from the Institute for Fiscal Studies found that around half of first-time buyers in their 20s received some financial help. Not only did this allow them to buy a home, but it could improve their finances over the long term, especially if they were able to access a lower mortgage interest rate as a result.
Additionally, gifting during your lifetime can be beneficial if your estate is likely to be subject to Inheritance Tax (IHT).
Gifts made more than seven years before your death are typically excluded from your estate for Inheritance Tax (IHT) purposes. Additionally, certain gifts, such as those up to £3,000 in the 2024/25 tax year, are immediately exempt from your estate when calculating IHT.
Consequently, you have the option to gift assets to decrease the total value of your estate, thus potentially mitigating or reducing an Inheritance Tax (IHT) bill.
For the tax year 2024/25, the nil-rate band stands at £325,000. If the total value of your estate falls below this threshold, no Inheritance Tax (IHT) will be applicable. However, if your estate surpasses this threshold, there are usually additional allowances and measures you can employ to lower the tax bill. If you believe your estate may be subject to IHT, please reach out to us for assistance.
Whether you’re considering giving a lump sum or providing ongoing financial assistance, there are several important factors to contemplate before making any decisions, including:
- What impact might removing wealth from your estate have on your long-term financial stability?
Will gifting assets during your lifetime alter the inheritances designated for your loved ones? Engaging in financial planning can aid in evaluating the consequences of gifting, assisting you in determining if it aligns with your objectives.
2. Passing on assets in a will
Leaving assets to your loved ones when you pass away is the traditional way to pass on wealth, and it’s an option that’s still right for many people.
This approach may appeal to you if you desire to leave behind a legacy for your beneficiaries. It could offer a financial advantage to your family in later years and could be utilized to fulfil various aspirations, such as early retirement or funding your grandchildren’s education at a private school.
Opting for a legacy may also be advantageous if you’re concerned that making gifts during your lifetime could impact your financial stability in later years.
If your intention is to pass on assets to your loved ones upon your demise, drafting a will is crucial—it serves as a means to outline your preferred asset distribution. In the absence of a will, your assets will be distributed according to intestacy laws, which may not reflect your intentions.
Nevertheless, there are drawbacks to be mindful of when bequeathing assets in a will.
One consideration is whether the financial assistance will arrive too late in the lives of your beneficiaries. If they are currently facing financial difficulties, receiving some or all of their inheritance before your passing may prove more beneficial.
Additionally, it’s prudent to contemplate the potential Inheritance Tax (IHT) liability of your estate when drafting a will. Taking proactive measures can often help minimize any eventual tax obligations.
3. Using a trust to hold assets
A trust is a legal mechanism for transferring assets, wherein a trustee oversees the assets on behalf of the beneficiary as outlined in the trust deed. As the “settlor,” you have the authority to dictate how and when the assets within the trust are utilised.
There are numerous motivations for utilising a trust, including:
- Maintaining heightened control over the assets you transfer.
- Transferring assets to minors or vulnerable individuals.
- Enabling you to transfer assets while still deriving benefits from them during your lifetime.
- Safeguarding wealth for subsequent generations.
- Mitigating potential Inheritance Tax (IHT) liabilities.
A significant advantage of a trust is the ability to specify how assets are utilized. If you have a clear vision of how you want your loved ones to utilize the wealth you provide, a trust may be a viable option. For instance, you could establish a trust for your grandchild, stipulating that it be used for educational purposes during their upbringing, with access to the assets granted upon reaching a specific age.
Various types of trusts exist, and once established, they can be challenging or even impossible to reverse. Therefore, seeking legal counsel when setting up a trust is advisable. This allows you to discuss your objectives and determine whether a trust aligns with your needs and preferences.
Contact us to set up your estate plan
You’re not limited to choosing just one of the options discussed in this article. You could opt to transfer some of your wealth now while leaving the remainder through a will. Alternatively, you might decide to gift assets to certain loved ones while utilizing a trust for others, such as young children.
A comprehensive estate plan extends beyond simply determining how you’ll distribute assets to loved ones. You may also wish to contemplate measures to enhance your security in case of future care needs, strategies to mitigate potential Inheritance Tax (IHT) liabilities, outlining your funeral preferences, and more.
Please contact us to talk about how to prepare for your later years and discuss how we could help you put an estate plan that reflects your wishes in place.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate estate planning or Inheritance Tax planning.
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