If you can afford to leave money to the next generation, whether through a living gift or as an inheritance when you die, you’ll want to pass your wealth on in a tax-efficient way.

There are HMRC rules that govern the amount you can gift to loved ones during your lifetime. You might also look at using a will or insurance policies written in trust.

Don’t forget to include your pension in your plans too. Current rules allow you to transfer unused pension wealth on to the next generation tax-free in some cases.

Be sure to consider all of your available options and speak to us if you’re unsure of the best option for you.

HMRC gifting rules

HMRC gifting rules allow you to pass wealth on to loved ones in a tax-efficient way during your lifetime.

Understanding your allowances can help you do this. There are three main rules to consider:

• Small gifts

You can give as many gifts of up to £250 per person as you want during the tax year. This could include birthday or Christmas presents, for example.

Be careful though, as once you use another exemption on the same person during a single tax year, the rule no longer applies.

• Exempted gifts

You can give away £3,000 in a single tax year without the gifts being added to the value of your estate for Inheritance Tax (IHT) purposes. This is known as your ‘annual exemption’.

You can also carry forward any unused annual exemption for one year. The allowance applies per individual so a couple can gift £6,000 in a tax year. This rises to £12,000 if neither of you used your annual exemption the previous year.

• Normal expenditure out of income

The normal expenditure out of income exemption allows you to make gifts if they are regular and making the gift doesn’t affect your standard of living.

Be careful when you make these gifts as HMRC will want to check that they meet their criteria. For example, if regular means roughly once a year, be sure not to make two payments in the same tax year.

This exemption could be used for more frequent payments too, such as funding life policy premiums, making regular pension contributions for family, or making regular gifts into a trust.

Use your pension

Your pension is designed to provide you with an income for the rest of your life, but there are ways it can be used to tax-efficiently pass wealth on to the next generation.

Any money you take out of your pension pot becomes part of your estate for IHT calculation purposes. But any money that you don’t use can be passed on tax-free in some circumstances.

If you die before age 75, for example, your unused pension pot can be passed on to any beneficiary you choose. Additionally, if your beneficiary retains the inherited amount in a pension environment, it won’t form part of their estate either.

It’s important to note that a pension beneficiary is chosen through your pension provider rather than via your will. Ask your provider for an ‘Expression of Wish’ form and check with them who your current beneficiary is.

If you die after age 75, your beneficiary will be charged Income Tax at their marginal rate. This could be less than they’d pay in IHT, depending on their personal income.

Taking a sustainable amount and not exhausting your pension pot means that you’ll have a portion unused and free to pass on. If you have multiple pension pots you might consider contributing to a pension scheme that you don’t intend to take, therefore leaving an untouched pot to pass on.

Finally, if your retirement income is comprised of other investments or regular income such as rent from Buy to Let properties, you might not need to take your pension at all.

If you have other income, consider leaving your pension benefits until last. That way, if you find you don’t need to access it in retirement, 100% of the pot can be passed on when you die.  

Placing assets in a trust

A trust is a legal document that allows you to pass on wealth to loved ones. It can be especially useful for passing money or assets to children or dependents.

Passing on wealth through a trust takes that amount out of your estate for IHT calculation purposes. Placing life insurance policies in the trust will also remove them from the value of your estate.

There are different types of trust available so it’s important to fully understand the implications before you take one out.

Contact us to discuss your options and we can help you find the one that is most appropriate for you.

Writing a will

Arguably the simplest way to ensure your loved ones receive an inheritance when you die is to put a will in place.  

Even if you have one, it is worth reviewing it, at least every five years but also after any significant life events. This will ensure the right people are included and that your wishes are known, and able to be carried out when you die.

Not having a will leaves your estate subject to the rules of intestacy. This might mean your estate is not distributed in line with your wishes.

Get in touch

If you’d like to discuss any aspect of passing your wealth on to the next generation, get in touch. Please email enquiries@futureplanningwm.co.uk or call 01793 575553.

Please note:

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.