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Imagine, one day, you inherit a large sum of money from a loved one’s pension (after they die). This person had heard that pensions can be handed down without inheritance tax (IHT), and so assumed that you would receive any remaining funds tax-free.
Whilst the money is, indeed, free of IHT your loved one did not fully understand the rule about what happens if they die after age 75. In this case, any money you inherit is subject to income tax when you take it out of the pension. Within this scenario, you need to access the money quite urgently (e.g. to tide over a recent redundancy) and so you make a large withdrawal – putting your income for the year into the next highest tax bracket.
This is just one example showing why intergenerational financial planning is so important. If you plan to hand down wealth to your loved ones, then you can safeguard everyone’s financial goals by coordinating your respective strategies. Below, our team at Wealth Solutions shows how intergenerational financial planning works and ideas to apply it within your own family. We hope this is helpful to you. If you’d like to speak to an independent financial adviser then you can reach us via:
T: 0121 446 5815
E: [email protected]
Intergenerational financial planning, explained
In short, intergenerational financial planning is about getting relevant family members to meet to discuss how wealth can, and should, be passed between them. Here, you all decide how to do this tax-efficiently, the timing of key steps/decisions, who controls what, who can access various assets, financial protection and how to maintain (or improve) standard of living.
This, of course, is a complicated process. Not only are high emotions likely involved (e.g. when deciding about inheriting key items), but you need to be aware of the current tax landscape now, how it affects each party and how this might evolve in the future. Each person will have different goals, priorities and beliefs about money. Here, it can help immensely to have an experienced financial planner to act as a guide for everyone – offering facts to inform good decisions which everyone, hopefully, can be happy with.
Intergenerational financial planning – an example
An illustration may help show the value of a financial planner in this context. Suppose a married couple are in their 60s and want to help their 3 adult children onto the housing ladder. Their idea is to offer each child a £20,000 lump sum, at the same time, totalling £60,000. After a child uses their lump sum on a property deposit, the couple will ask him/her to make monthly repayments (without interest).
On the surface, this seems like a good plan. It takes pressure off each child to raise such large sums themselves, and ensures that the couple are no worse off, in the long run, for helping their children. Yet there is a potential problem. What if the couple suddenly died shortly after making these gifts totalling £60,000? Here, their estate would potentially need to pay inheritance tax (IHT) – and this could create an issue. In particular, the £60,000 would be regarded as part of the deceased’s estate as so potentially liable to IHT (at 40%). This potentially would need to be paid out of the £60,000 itself, leaving much less for the children than originally intended.
How could this whole subject be approached differently? One idea could be for the couple to give each child £2,000 per year (£6,000 total) over a series of tax years. This would fall within the couple’s combined annual IHT-free allowance for gifts. Each child could then put each £2,000 gift straight into their own lifetime ISA (assuming they are a first-time buyer), where it would receive a 25% “bonus” from the UK government at the end of the tax year. With some good investment performance (within the lifetime ISAs) and their own contributions, each child could reach their £20,000 deposit target in as little as 4-5 years – without any IHT risk.
Start early on
The above example only works, of course, if both the parents and children sit down together and agree on the plan years in advance. The later an estate plan is left, the fewer options there tend to be for intergenerational planning. As such, consider having the discussion with your loved one(s) sooner rather than later.
One great benefit of planning early is that you could start passing down assets tax-efficiently, sooner. This lets you enjoy seeing the impact and joy from your gift(s), possibly also helping your loved ones achieve their own financial goals faster – such as getting on the housing ladder. Later on, if tax laws change you also have more time to adapt your intergenerational plan to accommodate the new landscape.
We hope this content has been informative and inspired you to develop your own intergenerational financial plan. Please get in touch if you’d like to discuss these matters with us via a free, no-commitment consultation with a member of our team:
T: 0121 446 5815/01926 888091
E: [email protected]