This piece has been written by my friend Una King who I first met when she was finance director of Cincom. In the early days of the Pension PlayPen, Una could be relied on to organise and orchestrate great days out. Brilliant days on the river , at the racecourse and at the rugby, Una became a friend. Then a few years ago she turned her back on her career managing corporate finances and retrained as a financial planner , joining SJP in 2015.
A lot has been said and written about SJP and their advisers, but people with the integrity and emotional intelligence of Una do not work for an organization that does not have a strong value set. SJP has changed and needs to change some more to put blue water between it and its ancestry. It is not just a FTSE 100 company but the sum of thousands of individuals, many of Una’s quality. We need a strong advisory community in the UK and SJP provide more financial advice than any other firm.
I would be delighted to host articles of the quality of this one, from any SJP adviser who contacts me. If you want to contact me, please do so at firstname.lastname@example.org
How to make sure that all the family get the best out of inheritance planning – Una King
At a glance
- With older generations living longer, children can be nearing their own retirement by time their inheritance arrives
- Women in the so-called ‘sandwich generation’ – caring for elderly parents while still raising their children – often face a dilemma when it comes to moving wealth between generations
- Whether you’re leaving or receiving an inheritance, there are ways to make sure your family gets the best out of any assets left behind
When it comes to passing money through generations of the family, it’s long been the case that when older generations die, their children receive whatever is left behind. But, with older generations increasingly expected to live into their 80s and even 90s, recent years have produced a shift – and one that poses a real challenge for women in the so-called ‘sandwich generation’.
These are the inbetweeners, often raising children and caring for ageing parents at the same time. More than six in 10 of those balancing those two duties are women, according to the Office for National Statistics (ONS)1.
In years gone by, people have tended to receive inheritances while they were still raising their own families and buying homes. Now, the financial boost arrives later in life, with the average age of inheritance lying between 55 and 64, ONS figures show2.
So, what does this mean if you’re in your 50s (or younger) and expecting an inheritance?
The line of inheritance
There’s a chance you’ll be receiving an inheritance just as you approach your own retirement. So, do you look at it as a way of boosting your pension pot? Or will younger members of your family benefit more?
Research published in 2019 by OneFamily found that some £19 billion had been left directly with the youngest generations in the previous five years, while another £23bn had been passed to the younger family members by the original beneficiaries (i.e. their parents)3.
More than half of beneficiaries aged over 55 who received family wealth after turning 50 chose to pass it on to their children and grandchildren, according to the report. And that’s not just benevolence: by passing money down a further generation, those in the middle can focus on their own finances without having to support their children as much.
Maximising the benefits
Inheritance tax (IHT) only affects a small minority of families, but the impact can be considerable. With 40% charged on the amount of any of the estate passed on above the nil rate band – currently £325,000 (rising to £500,000 when the ‘main residence nil rate band’, currently £175,000, is added4) – IHT can take a big bite out of any wealth being handed down5. If there’s any IHT to pay, it comes out of the estate of the person who has died – so the beneficiaries only get what’s left once IHT has been paid.
There are several ways to mitigate IHT or avoid it altogether, particularly if you’re helping your parents pass on their wealth effectively:
- Gifting – The annual gift exemption allows you to carry forward £3,000 from the previous tax year, doubling up the gift exemption to £6,000. Couples can each use this exemption. Similarly, small gifts up to £250 in a tax year to any number of people are completely free of IHT, while gifts when your children and grandchildren get married may also be exempt.
- Creating trusts – By placing assets into a trust, you can keep them out of your estate for IHT purposes. There are several different types of trust, with different tax rules, so advice is recommended.
- Donating – You can also reduce the IHT charge on your remaining assets from 40% to 36% if you leave at least 10% of your total estate to a registered charity.
Getting it right
Whether giving or receiving, there can be a lot of decisions to make and tax rules to know about. So making the right financial choices is hard enough anyway, but when a member of the family has died it can be even more difficult to think clearly. And there might be some delicate conversations to be had around intergenerational finances. After all, many of us would prefer to avoid talking about either money or death, so inheritance planning is a double whammy.
An adviser can help facilitate some of these conversations, helping you to understand how to best protect both you and your family. Understanding how much money is involved and where it fits in as part of your long-term plans can provide peace of mind and help ensure that your money passes to your loved ones in the most effective way, without compromising your own financial security.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
1 ONS, More than one in four sandwich carers reports symptoms of mental ill-health, January 2019
2 ONS, Intergenerational transfers: the distribution of inheritances, gifts and loans, Great Britain: 2014 to 2016, October 2018
3 OneFamily, £8.5 billion inheritance skipping a generation every year, August 2019
4 HMRC, Inheritance Tax thresholds and interest rates, April 2020
5 Gov.uk, Inheritance Tax
This blog was first published here and is reproduced with Una’s permission.