Planning is vital to passing on your wealth to children or grandchildren

As you reach retirement age with many of your life goals hopefully already met, your thoughts may turn to how you can help your children and grandchildren achieve theirs.

There are many ways that wealth can be passed down to loved ones, so there are several key issues that you could consider. The options for passing on your wealth depend on the age of the beneficiaries and the complexity of your estate.

One of the most important factors that should be taken into consideration is inheritance tax (IHT). It’s worth bearing in mind that tax planning varies with the circumstances of each individual and tax laws may change in the future.

Gifting your wealth to children or grandchildren

Inheritance tax can be applied to large gifts – such as money, household and personal goods including jewellery and furniture, a house, land or buildings and financial assets – if they are given less than seven years before your death. There are numerous things you could do whilst you are alive, to reduce the value of your estate and potentially reduce any IHT due to be paid on your death.

You can give away a total of £3,000 worth of gifts each tax year to one person or split between several people, and any unused annual exemption can be carried forward to the next tax year for one year only.

Additionally, you can give as many gifts of up to £250 per person as you want each tax year, as long as you have not used your £3,000 allowance on the same person. Birthday and Christmas gifts from regular income are also exempt.

Each tax year, you may also give up to £5,000 tax-free to children getting married or entering into a civil partnership, or £2,500 to a grandchild or great-grandchild.

No tax will be due on gifts if you live for seven years after giving them. Any gifts made within three years before your death will incur a 40 percent tax charge and, after that, on a sliding scale known as ‘taper relief’. However, inheritance tax only applies to gifts in the seven years before you die if your estate is worth more than the £325,000 tax-free threshold if you have no property, or £500,000 if you own a house.

Don’t leave it too late to put a plan in place

We believe planning for the unexpected is essential. When you die, there could be considerable financial implications for your next of kin, such as debts that must be paid from the estate. Therefore, having your financial affairs in order could give you the peace of mind that your children and grandchildren are provided for after you die. But it is crucial to plan early.

The first step of estate planning is to list all your assets and debts; this can help the person dealing with your estate to understand it better.

Making a will ensures your estate is disposed of in accordance with your wishes. It should set out who you want to benefit, name an executor responsible for carrying out your wishes, and explain what happens if the people you want to benefit die before you.

When the estate is more complex, it may help to set up a trust. While this can be costly and complicated, a trust offers several benefits and is particularly handy if you want to make gifts to children under 18 who can’t take legal ownership of the gifted assets. Trusts can also help reduce inheritance tax liability, as the assets won’t be included in your estate when you die. However, they must be held in trust for seven years before your death.

The next generation

The easiest way to pass on wealth to children and grandchildren under 18 is through a Junior ISA (JISA) or Junior SIPP.

The Junior ISA acts as a savings account for children under 18 and, like the adult versions, can either be held in cash or in stocks and shares and benefits from considerable tax benefits. Junior cash ISAs do not incur tax on interest, while stocks and shares ISAs are not taxed on any dividends or capital gains. A child may have one or both types, but the annual savings limit for the current tax year is £9,000. The beneficiary will be able to take control of the account from a parent once they reach 16, but cannot withdraw any money until they turn 18.

The Junior SIPP – a self-invested personal pension – allows children to start preparing for retirement and begin building their pension pot. A parent will make investment decisions on behalf of the child until they hit 18. It is accessible when they reach retirement age (which rises to 57 from 2028). The annual allowance is £3,600.

Remember that the value of investments and pensions and the income from them can fall as well as rise and are not guaranteed and so you may not get back the money you put in.

Whatever your circumstances, a professional will be able to help you prepare to manage your estate and pass on your wealth to your children and grandchildren. This could not only provide you with invaluable peace of mind but could also help your loved ones to enjoy a financial stable future.