It is becoming increasingly important to consider when and how you would like to pass on wealth to the next generation when the time comes.

Historically, this was commonly done on death in accordance with a Will; however, with an increasing number of people finding themselves liable to pay Inheritance Tax (IHT) (see our recent blog post on this very subject), many are now considering the benefits of gifting money or assets during their lifetime.

Opening the “Bank of Mum and Dad” and giving money away can be one of the simplest solutions to reduce a potential Inheritance Tax bill. There’s an annual exemption, a small gifts allowance and an exemption for wedding gifts. Over and above these, you can make further gifts which will escape the Treasury’s reach, provided you survive for a period of seven years afterwards.

However, some are reluctant to do this for a variety of reasons, such as:

• Concerns that beneficiaries of the gift will not be financially responsible with it.
• Worry that the proceeds of any gift will form part of a future divorce settlement.
• A desire for the next generation to understand the value of money and make their own way in the world.
• Fear the money could be swallowed by a failing business or bankruptcy.
• Ensuring fairness of gifts to different family members.
• The next generation have no need for the assets and potential to increase their tax liability.

All of the above are common concerns expressed by individuals as they deliberate on how they would like to achieve their goals and reduce future tax liabilities. If this is the case, alternative options can be considered.

Trust planning

Gifting money or assets into a trust is a great way of reducing the value of your estate without giving up full control.

Trusts can be set up during an individual’s lifetime and although you can usually no longer access the assets yourself, by being a trustee you can maintain control of who should benefit and when.

You can decide who will benefit from the assets of a trust although this is typically children and grandchildren. Various types of trust are available depending on your individual objectives and some will even allow you to receive an income back from the trust.

As you can control how assets are distributed, you can ensure that children or grandchildren do not have access to assets or money before they are responsible enough to manage it. Furthermore, income or capital can be distributed to some while preserving capital for others within the trust, ensuring fairness between specific groups of beneficiaries. It is even possible for grandchildren not yet born to benefit from a trust.

Any assets are owned by the trust and therefore protected from any divorce settlements or bankruptcy in the future.

Pension contributions

Making pension contributions for children and grandchildren can provide them with a healthy start to retirement. Up to £60,000 can, technically, be contributed each tax year, but this is limited to an individual’s taxable earnings. However, even with no income a gross contribution of £3,600 can be made, which is a popular choice when saving for a grandchild.

Monies held within a pension can grow free of tax, and tax relief is available to any individual under the age of 75, even if contributions are being made by a parent or grandparent. For example, to maximise a contribution for a grandchild, a contribution of £2,880 can be made and increased to £3,600 with £720 tax relief (even if the recipient is a non-tax payer!).

Currently, access from a pension is not permitted until the age of 55, however this is due to increase to 57 by April 2028 with scope to be pushed out even further in the future. Monies invested for the longer term will have the benefit of greater growth potential. If sufficient contributions are made this can also reduce the level of contributions required by the beneficiary to enjoy a comfortable retirement.

Whilst money is held within a pension it will benefit from being exempt from IHT. If not used during a person’s lifetime, it can simply be passed down the generations in a tax efficient manner.

Junior ISAs

Although a Junior ISA can only be opened by a parent or guardian, anyone can contribute, making it an excellent way of providing for children and grandchildren.

Savings are tax-free and can only be accessed by the child after the age of 18, making it a popular choice to save towards further education costs or a deposit for a first home. The annual allowance is currently £9,000.

As with pensions, lump sums and regular contributions are allowable. If regular payments are normal expenditure from income then they are exempt from IHT provided records are kept. 

Find out more

This is not an exhaustive list of the options available and if considering making gifts during your lifetime you should seek professional advice. If you’d like to hear more about this subject, please don't hesitate to get in touch with myself or a member of our Wealth team.

Disclaimer: Johnston Carmichael Wealth Limited is authorised and regulated by the Financial Conduct Authority. 

This communication is based on our understanding of tax legislation as at 14/04/24. The value or benefit of any specific tax reliefs or allowances will depend upon your own situation.

All statements concerning the tax treatment of products and their benefits are based upon our understanding of current tax law and HMRC practices. Legislation and the levels and basis of reliefs from taxation are subject to change and are dependent on your individual circumstances.

The financial conduct authority does not regulate tax and estate planning.