Rebalancing generational wealth
Whilst perhaps some time ago, in 2016 the then housing minister suggested that inequality between the so-called baby boomers and the younger generation might be reduced if parents were to leave their properties to their grandchildren (rather than to their children) in their Wills. This suggestion remains relevant today given the greater opportunities the older generation have had to acquire wealth, including more affordable house prices, final salary pensions and the availability of student grants.
What can I do to share wealth with younger family members?
Making gifts to your children for your grandchildren’s eventual benefit may be something you are already doing. Substantial gifts outright or using trusts require thought from both an inheritance tax and a long-term provision prospective.
It is important to remember that care fees are expensive and the time spent in care is generally increasing. This means that if you wish to help the younger generation with lifetime gifts, you should ensure that you retain sufficient assets to pay the fees on a care home of your choice or to pay for sufficient care in your own home.
Gifts out of surplus income
If you have an excess of income over and above that required to maintain your normal standard of living, then you might consider making gifts on a regular basis out of income. Consistent gifts out of surplus income are a method used to prevent wealth building up in your estate and these gifts should consequently be free from inheritance tax (IHT). If your income needs change, you can stop the gifts at any time.
Can I gift my house and still live there?
There may be significant equity in your home, but any gifts from equity are difficult to make in a way that is effective from the viewpoint of both IHT and long-term care fees. Any gift of your home, if you continue to live there without paying a full market rent, is likely to be ineffective for IHT saving. In addition, its value is likely to still be included in any care fee assessment to determine the amount of local authority funding you are entitled to.
It’s easier to share equity if you decide to downsize. This is because any capital gift then made from the sale proceeds will be IHT free if you survive it by seven years. Alternatively, a mortgage adviser may be able to suggest how your equity can be used to support a younger member of the family in obtaining mortgage finance.
How can I protect beneficiaries?
You might have doubts about how your children or grandchildren might use any gift you make to them. If the assets given are substantial, a trust can ensure that a degree of asset protection is maintained and the trustees will manage the asset on your children and grandchildren’s behalf. As far as smaller gifts are concerned, it may be helpful to pay the sum given direct to, say, your child’s student loan provider or to your grandchild’s school to reduce fee payments.
If you are considering taking the housing minister’s advice and skipping a generation to leave assets to your grandchildren, it would be advisable to discuss it with your children first. This is because disgruntled children who do not believe that they have received reasonable financial provision from your estate can claim against it. If your children are understanding of your thought process, this can save considerable IHT and prevent double taxation as the asset will not pass through your children’s estates.
Remember too that your children might appear to have sufficient income and capital at present but events such as divorce and business failure can impact circumstance in an instant. An alternative, and often preferred, option is to put assets into a discretionary trust in your Will. This will negate the need for any crystal ball gazing and enable a decision to be made at the time as to how your estate is to be distributed. For instance, a distribution weighted in favour of your grandchildren may not be a good idea at the time of your death. Our solicitors always try to draft Wills so that they are built to last and can withstand change.
Property closely inherited by direct descendants and tax
The residence nil rate band (RNRB) was introduced in 2017. It is an additional IHT allowance for people who leave property to children and/or grandchildren. For a married couple, it can provide an additional £350,000 tax free allowance in addition to the nil rate band (NRB), which is currently £325,000 each. If your estate or your combined estate is around £2 million, planning could be written into your Will to ensure that you do not lose out on this allowance.
What if I inherit from my own parents and want to pass the money to my children?
If you inherit from your own parents and feel that your children could benefit more from the money, then you could consider varying your parent’s Will with a deed of variation. You could do this by diverting the inheritance to your children outright or by diverting it into a discretionary trust. This is often considered an effective tax planning strategy as the gift will be deemed to have been made by your parent for IHT purposes. If you wish to retain access to the assets for the future but want to ensure that they are outside of your estate for IHT purposes, using a discretionary trust is the solution. There will be no IHT charge on the trust assets on your death and there will be a fund available at the trustees’ discretion for the whole family.