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Inheritance and passing on wealth

How to prepare future generations for wealth

Making early plans for inheritance can provide significant reward.

Preparing the next generation for wealth

You can’t take it with you, the saying goes, which may be why so many people want to pass their wealth on before they die. Four out of 10 over-50s plan to give their families financial gifts while they’re still alive, allowing them to share in the positive impact of their inheritance.1

Early inheritances don’t just provide a sense of personal wellbeing, they also have the potential to deliver substantial financial gain and tax benefits for both parties too.

However, passing on wealth early comes with challenges. Familial relationships are rarely straightforward; simply handing money to offspring before they are ready is fraught with potential dangers; and inheritance tax planning is complex and requires support and advice. Moreover, getting children to appreciate family wealth and their inheritance has its own difficulties.

One way to engage this next generation is to frame investment conversations around the causes they care about – 85% of millennials have shown vocal and active interest in investing to address the world’s social and environmental challenges.2

This approach, known as impact investing, offers the possibility to invest for both financial returns and positive societal outcomes. Investing in a way that supports the causes the younger generations care about can also start them on the investment journey earlier.

While no two children or estates are the same, there are ways to take positive action to share wealth between the generations.

It is normally advisable to start planning for the future as soon as is feasible and here we look at possible inheritance strategies you could undertake now so they are ready for different stages of your children’s lives.

Under 18s

At this age children need maintenance more than they need money.

It’s never too early to educate children in financial matters, and technology can really engage young people in saving and investing. The trick is to make it relevant: if children understand the benefits of long- and short-term saving, they are more likely to take up the habit. Setting achievable near-term savings targets that are rewarded relatively quickly, alongside longer-term goals, gives young people a first-hand experience of what it means to save.

As well as traditional pocket money and bank accounts, putting a modest amount into a Junior ISA is a sensible way to get children into saving while limiting their access to the final pot.

Of course, no two children are the same and the level of education and engagement of each child will vary from family to family.

18-25-year-olds

As children become adults it could be the time to pass on some wealth. However, even where there is a substantial pot to share, parents need to be sure that they will have enough money to see them through later life. Wealth planners can help to set a realistic financial plan that provides enough income to live comfortably.

Once the plan is in place, surplus cash can be gifted to ensuing generations – and, as long as the person gifting the money does this more than seven years before their death, it’s exempt from inheritance tax (IHT).

Yet, parents and grandparents may be worried about passing significant sums to their offspring, in case those children squander it.

One way to ease this concern is to put money into a discretionary trust. Although the seven-year inheritance tax rule applies to this money, parents can retain an element of control over how it’s spent. Such a trust ringfences capital and allows it to be spent on future objectives. For example, the individual who has gifted the money to a trust can provide the trustees with a letter of wishes outlining how they would like the trust capital to be distributed to the beneficiaries. However the trustees have ultimate say over how the assets are distributed and your wishes are not legally binding. There are additional things worth noting when putting assets into a discretionary trust – for example, it may trigger an IHT entry charge of 20%, unless it’s within the nil rate band. Plus, as a trustee you’ll have to pay a charge on every 10th anniversary of the date your trust was set up, if your trust contains relevant property above the IHT threshold.

Over 25s

Paying for weddings, setting up businesses and buying houses are among some of the most useful gifts that the older generation can pass to the next. Yet such life events may never come to pass, and even if they do it may not be clear when the money will be needed.

Flexibility is key. Individuals can choose savings and investment options that are accessible and under their control, but free from inheritance tax. This means that if they die before they need to call on the lump sum, the next generation does not face an unnecessary tax bill. Defined contribution pension schemes are now accessible from age 55 (rising to 57 in 2028) and they do not count as part of your estate making them exempt from inheritance tax. Using pensions as part of intergenerational financial planning, allows individuals to choose to cash in some or all of their pot to pay for a loved one’s special event, use it to fund their own retirement or keep it as part of their estate on death.

Investing in shares that qualify for Business Property Relief (BPR) is another way to retain control, protect against inheritance tax and potentially benefit from investment growth albeit at the expense of a higher risk of loss. To qualify for business relief, shares must meet specific rules such as not being listed on main stock exchanges, but as long as they are held for two years before death they do not qualify as part of the taxable estate. But investing comes with risk and BPR shares are higher risk than investing in publicly listed companies because they often rise and fall in value more quickly and may be more prone to collapsing completely. A wealth planner should oversee the process.

You need to bear in mind that tax rules can change in future and their effects depend on individual circumstances, which can also change.

Passing wealth to the next generation can be hugely beneficial, but only if it is done carefully. Judicious planning, flexibility and sound advice are key. To learn more about your wealth planning opportunities, please speak to your Wealth Manager, who can put you in touch with a Wealth Planner.

Barclays is not providing you with financial, legal or tax advice, so nothing contained in this article should be construed as constituting legal, financial or tax advice. Tax rules and legislation can change and the benefits and drawbacks of a particular tax treatment will vary with individual circumstances. We recommend that you take professional advice where required. You have sole responsibility for the management of your tax, financial and legal affairs, including making any applicable filings and payments, and complying with any applicable laws and regulations.

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