Published: 28 June 2019
Some £5.5 trillion of assets could be transferred between different family generations over the next three decades, according to recent research by the Centre for Economics and Business Research1.
Setting up savings for a grandchild, funding a child through school, planning for retirement and paying for an elderly parent’s long-term care are just some of the challenges that families can face. But they represent opportunities too, with several relatively simple steps that families can take to keep finances on track across different generations.
Here we look at some of the main options.
There are several ways in which family members (and friends) can save and invest for children, from cash accounts to pensions. For example, the Junior ISA allows parents and grandparents to set aside up to £4,368 (in the 2019/20 tax year) tax-free, in either cash or stocks and shares or spread across both.
Up to £2,880 (in the 2019/2020 tax year) can also be paid into a pension for someone aged under 18, including a Self Invested Personal Pension (SIPP). Even where children don’t pay tax, they still benefit from the tax relief available on pension contributions. This means the £2,880 is actually worth £3,600 once the provider claims back the £720 tax relief.
You can nominate a chosen beneficiary or beneficiaries if you’ve got a personal pension or a Self Invested Personal Pension (SIPP) through an ‘expression of wish’, which tells the pension company who should receive your funds if you die.
Adjustments can be made to reflect changes in your preferences or circumstances, so it’s worth reviewing all your pensions to ensure each expression of wish still reflects your wishes.
This is a legal authority given by someone (the donor) to one or more individuals allowing them to handle their financial or legal affairs. This typically occurs where the donor is unable to make their own financial decisions (or expects to be unable to), due to age, loss of mental capacity or because of some other form of vulnerability.
These can be useful in families in a variety of different circumstances, to help keep the family finances running smoothly. It’s an area where advance discussion with other family members is important, if circumstances allow, given the potential practical and emotional complexities.
Having an up-to-date Will makes life a lot easier for the surviving family members when an individual passes away, providing clarity and preventing confusion by setting out who gets what. It also names the Executor responsible for sorting out the estate left behind (usually a family member or close friend). Where someone dies without a Will - known as dying ‘intestate’ - the distribution of the estate can be much harder.
The Money Advice Service website offers useful information on what to do when a Will is in place and when there is not. Remember that the rules covering issues such as Wills and Power of Attorney are different in Scotland to those in England and Wales.
When Wills are being drawn up or reviewed in a family, It’s also worth thinking about the way that the needs of family members can change over time - for instance, the estimated average age at which millennials will inherit is 61, when they will themselves be looking towards retirement rather than raising their own families2.
Who is going to get the most from a legacy and what may it mean for their tax affairs at the time? Could there be benefit in leaving some legacies direct to members of the youngest generation for example?
The UK government took a record £5.4 billion in inheritance tax (IHT) in the 2018-19 tax year, up 3.1% (£164 million) from the previous 12 months3. Canada Life has predicted that this could hit £10 billion per year by 2030, based on current trends and rules4.
IHT is charged at 40% on the amount of any inheritance passed on above the nil rate band, which since 2009 has been frozen at £325,000. Spouses and civil partners can pass any unused nil rate band on to the survivor when they die. In addition, someone passing on their main home to a direct descendant can benefit from the main residence nil rate band, currently £125,000, rising to £175,000 by the 2020/21 tax year5.
Yet IHT is also referred to on occasion as the ‘voluntary’ tax, due to the various possibilities for mitigating its impact. For instance, up to £3,000 a year of assets or cash can be given to a beneficiary without IHT being charged on it, while small gifts of up to £250 can be passed on IHT-free during a tax year to any number of people (provided they didn’t gain from the annual exemption). You can read more in our dedicated article Six ways to manage inheritance tax.
If you’re the one taking a financial lead in your family, consider making a financial plan that involves the whole family, with professional help if needed.
Talk to older family members to agree plans around matters such as long-term care and managing any Inheritance Tax that may become due. Likewise, work with your children to help them manage their money effectively and begin building savings. Being intentional about these things could pay dividends for all of you in the longer run.
This is provided for general information only and takes no account of personal circumstances. It is not a recommendation to buy or sell. It is provided solely to support you in making your own investment decisions. If you have any doubts as to their suitability you should seek expert advice. Alliance Trust Savings does not give financial or investment advice.
Laws and tax rules may change in the future without notice.
Please be aware that the value of investments can fall as well as rise so you could get back less than you invest. Past performance is not a guide to future performance.
1 Money Marketing - why the family office should be hitting the mainstream - 9 April 2019
2 Resolution Foundation - Millennials are set for an ‘inheritance boom’ but it won’t solve their home ownership and inequality woes - 30 December 2017
3 FT - More people paying capital gains and inheritance taxes - 26 April 2019
4 FTadviser - inheritance tax receipts to double by 2030 - 29 April 2019
5 Low Incomes Tax Reform Group - What is the nil rate band? - 18 May 2019
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