How to plan wealth transfers within your family

Money can be a sensitive topic even among close families. But you will have a better chance of passing on assets tax efficiently in a way which is acceptable to all family members if you discuss and plan how to do this. 

Before thinking about passing wealth to younger generations, ensure that you have enough for your own needs for the rest of your life, including possible future care expenses. Because this is so important, it could be worth getting professional advice to help you assess what you can afford to give both during your lifetime and after.

Then you can discuss what you intend to pass on and how you might do it with children and, if they are old enough, grandchildren. The sooner you do this, the more options you will have for transferring wealth tax efficiently. There are also some key events when it is particularly important for parents and grandparents to discuss wealth transfer with their family – if they have not already done so.

“These include the birth of a child or grandchild; starting school or higher education arrangements, perhaps facilitating a private school education and early adulthood firsts such as a home, vehicle purchase or career development support,” says Sue Wakefield, director at wealth management firm ZEDRA. “The first conversation may be around budgeting if children are going to university, for example, and this can lead to early discussions around investing, pensions and best use of tax allowances as they move on to start a career or a business.”

Other good points to consider and discuss plans include marriages, and when looking to protect wealth in case relationships don't last, retirement planning to protect yourself while allowing family members to access wealth, and when making later life arrangements in case you lose capability.

Louise Rycroft, financial planner at Timothy James & Partners, says that when approaching retirement, it is important to assess how much money you need to generate for the rest of your life and “births, deaths and marriages are times when you should reassess wills and, in some cases, set up trusts for new grandchildren”.

Wakefield says that you can start by thinking about what your aims are for your wealth. “Establish what’s important to you and how you want your wealth to impact your family,” she says. “Then create a long-term plan for your family and involve them in the conversation at this stage. You also need to continuously review the actions you have taken to ensure that you are making the most of any new allowances or options available, and your actions are aligned with your changing family structure.”

She adds that it’s important to agree on and discuss on an ongoing basis how the intergenerational transfer of wealth will best be effected. “Parents and grandparents will have a view on the best time to start transferring wealth [but] this may differ from their children’s views,” she says.

You need to consider how you are going to split your wealth between your children and grandchildren. Even if you give your children equal amounts, you could give it in different ways at different stages.

Sarb Chahal, senior wealth planner at Sanlam UK, says that, for example, if you have a younger child who is earning less than their siblings and would like help to buy a home or set up a business, you could give them money towards that now. And you could leave the same value in your will to your older children. Making a lifetime gift can also reduce the size of your estate and heirs’ potential inheritance tax (IHT) liability, which would benefit children due to receive assets after you die.

Another option could be to leave assets to your grandchildren if, for example, your child (their parent) is wealthy, doesn’t have a financial need for your assets, and has already or is likely to build up an IHT liability of their own.

When you have established what you want to do, having an up-to-date will which reflects your wishes is essential. And while it might seem less relevant, advising your children to write a will to protect their assets and family is also important – especially if they have children of their own.

It is also a good idea to have a Lasting Power of Attorney in place in case you lose the capacity to deal with your finances and enact your plans. If you intend to appoint your children to do this you will need to go through the details with them.

Changing families

Family structures change due to births, deaths, marriages and divorces so it is important to account for this in your planning. “Review and renew wills, if necessary, when family circumstances change,” says Wakefield. “The use of flexible structures such as discretionary trusts can offer some protection from losing their inheritance if children divorce and enables grandchildren to be automatically added to the class of beneficiaries of the trust when they are born.”

If you are concerned about your children losing a lifetime gift of money in the event of a divorce, you could initially give it to them as a loan rather than a gift, suggests Rycroft. A divorcing partner would not be able to take this away from your child and it could also be useful if at that stage if you were uncertain as to whether you could afford to gift away the money. This would mean that the money would come back into your estate but further down the line you could waive the loan so that it becomes a gift. And if you lived for seven or more years after waiving the loan it would fall outside of your estate for IHT purposes.

Also see How can I reduce my IHT liability and number of investments? (IC, 17.12.21) on whether to write off loans to your children

Another way to retain some control of assets you gift to your family is to put them into a trust on their behalf. The trustees, maybe yourself and your partner, can retain control over where the assets are invested and how much is paid out of the trust to the designated beneficiaries which could be children and/or grandchildren. “If set up correctly they can also protect your family wealth if your beneficiaries subsequently get divorced, for example,” adds Harry Plunkett, wealth planning adviser at Canaccord Genuity Wealth Management.

There are many different types of trust so it is important to pick the right one for your purposes. Some trusts can also be expensive to set up so it is probably best to exhaust one of a number of other options before resorting to these. See Tax planning and the role of trusts, (IC 02.10.20) for more on this.

Family investment companies, meanwhile, can be a good way to pass on wealth without incurring IHT while maintaining control of assets. See When should you set up a family investment company? (IC, 23.10.20).

Mitigating IHT

Each person can pass on assets worth up to £325,000 without incurring IHT, and if you leave your primary residence to your children, grandchildren or other direct descendants you can offset its value against the residence nil rate band of £175,000. This means that married couples and civil partners, in total, can pass on assets worth £1m to direct descendants without incurring IHT. 

If your assets exceed your IHT allowance you can reduce your estate’s IHT liability by making gifts during your lifetime. You can give away gifts worth up to £3,000 each year without incurring IHT, and £5,000 to a child and £2,500 to a grandchild when they are getting married. You can also make regular gifts out of your income, if you do not spend it all, which are IHT free.

If you make gifts during your lifetime above this value and live for seven years after making them they fall outside your estate for IHT purposes – a reason why advisers suggest planning wealth transfer to your family as soon as possible. If you die between three and seven years after making them, they may incur IHT but possibly at a lower rate. One way to cover this liability is life insurance known as a gift inter vivos policy, which covers the cost of the recipient’s IHT liability if you die within seven years of making them a gift.

“If you make gifts during your lifetime, you need to be aware of the gifts with reservation of benefit rules which can mean the gift remains inside your estate for IHT purposes,” adds Plunkett. “For example, if you gift a property and continue to live in it without paying a market rent, this would be considered a reservation of benefit.”

Also see Make lifetime gifts to your family tax efficiently (IC, 26.02.21)

If you receive an inheritance you do not need you could pass it onto someone else, for example, your children, by applying for a Deed of Variation to the original will within two years of the date of the death. “This ensures the inheritance never comes into your estate for IHT purposes so can save IHT,” says Plunkett.

The residence nil rate band of £175,000 starts to taper when your estate is valued at £2m or more, by £1 for every £2 of value in excess of the £2m threshold. But you could gift away assets during your lifetime to reduce your estate’s value to less than £2m to preserve the full residence nil rate band. These would fall back into your estate until you had lived for seven years after making them, but you would immediately benefit from the residence nil rate band.

A key way to pass on assets without incurring IHT is a pension, if you do not need the assets within this during your lifetime. The assets held within these grow tax free and if you die before age 75 your heirs can take the pension tax free. If you die after age 75 those who receive your pension pay income tax at their marginal rate on withdrawals from it. “This is very efficient if the recipient is a child or a non taxpayer,” says Rycroft.

Pensions can also be set up and run fairly cheaply, and do not necessarily involve any complicated tax planning. So if you have other assets to finance your retirement, consider drawing these before your pension.

Other ways to mitigate IHT include investing in products which offer business relief, such as portfolios of certain Aim-traded shares, which fall out of your estate for IHT purposes two years after you have bought them.

<box out> Putting it to your parents 

Perhaps even more difficult, but potentially very helpful, is for younger generations of families to raise the issue of wealth transfer with parents and grandparents. “Start talking as early as possible and make feelings known,” says Sarb Chahal at Sanlam UK. “If, say, you would rather start to receive money now than in 30 years make sure that your parents understand. Make clear what the money is for – if you share your aspirations and goals it is easier for your parents to plan. They can’t help unless you share what you’re looking to achieve.”

Ensure that your parents and/or grandparents have a well drafted will that accurately reflects their current personal situation and assets. Sue Wakefield at ZEDRA thinks that it is a good idea to suggest that they put in place a Lasting Power of Attorney in case they become incapacitated or unable to manage their affairs – if they have not already done this. “Doing this now prevents delays and upset at what would already be a very difficult time,” she says.

If older generations of your family are reluctant to discuss wealth transfer or details of their wealth they could miss opportunities to mitigate IHT. So you could suggest that they discuss estate planning with a specialist as they may be more open to doing this than discussing it with their family.

If you have lasting power of attorney for a relative speak to them about how they would like you to manage their financial affairs as they might not be capable of telling you if and when you need to act on their behalf.

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