Intergenerational Wealth Transfer

The efficient transfer of wealth to your children requires careful tax planning and the strategic use of available legal and financial industry tools. The types of transfers that can mitigate financial liabilities can include tax-efficient gifting or trusts. It’s also important to maintain clear communication with beneficiaries and advisers to ensure their future economic security. 

Lifetime allowance and inheritance tax 

Inheritance tax (IHT) is due on an estate when someone dies, but careful planning can reduce its impact on the amount you leave to loved ones. Key strategies include:
• Spousal exemption: Assets left to a spouse or civil partner are exempt from IHT.
• Nil rate band: Up to £325,000 can be transferred tax-free; amounts above this are taxed at 40%.
• Residence nil rate band (RNRB): Adds an additional £175,000 tax-free allowance when a main residence is passed to a direct descendant, increasing the total tax-free threshold to £500,000 for married couples and civil partners.
• Business and agricultural relief: Reduces the taxable value of qualifying business and agricultural assets.
• Tax-free gifting: Certain gifts up to specified amounts are exempt from IHT, reducing the taxable estate. 

Tax-efficient gift giving 

Financial gifting strategies can be an important part of inheritance planning, as they can reduce the tax implications on your estate.

• Annual exemption: Gift up to £3,000 per year tax-free, with unused amounts carried over to the next year.
• Small gifts exemption: Gifts up to £250 per recipient are tax-free and do not count towards the annual exemption.
• Gifts from surplus income: Regular gifts from surplus income, such as salaries or rental income, are exempt from the seven-year rule if they do not impact the giver’s standard of living.
• Special occasion gifts: Gifts for specific events, such as up to £5,000 for a child's wedding or contributions to education and living expenses, are exempt from IHT.
• Charitable contributions: Charity donations are tax-free and giving more than 10% of your estate to charity can reduce the IHT rate on the remainder by up to 4%. 

Trusts 

Trusts have a range of benefits for intergenerational wealth transfer and can be another effective way to pass on assets while limiting IHT implications. Intergenerational communication about money is crucial when setting up trusts to ensure trustees and beneficiaries understand the arrangements and their responsibilities. 

• Safeguarding assets and reducing tax liabilities: Trusts protect assets and minimise tax burdens. 
• Bare trusts: Parents often use fixed beneficiaries to transfer assets to children, subject to the seven-year inheritance tax rule. 
• Discretionary trusts: Provide flexibility for trustees to distribute assets among multiple beneficiaries, allowing better control over the timing and allocation of funds. 

Contact our team of advisors for tailored advice about intergenerational wealth transfer.