The generation game

The wealth divide between generations is widening and Millennials, or those in their 20s and 30s, have been hit hardest. Soaring property prices and stagnant wage growth mean it now takes first time buyers an average of 20 years to save for a mortgage deposit.

Factor in rising living costs and student debt and it’s easy to see why so many young people are struggling to save, let alone fund their pensions.

A balancing act

If you’re able to help younger family members financially, you’ll want to strike a balance of passing on your wealth without compromising your standard of living. You may also want to limit the amount of help you offer in terms of encouraging your children/grandchildren to pursue a career.

Ways to help

Families often opt to help with special costs, such as education, mortgage deposits, wedding expenses, and pensions. This ensures that money is gifted for a purpose; however, for Inheritance Tax reasons, gifts must be given away completely (i.e. without any strings attached), so an element of trust is required!

When can you start?

You can start saving on a child’s behalf from birth and there are ways to do this tax efficiently, such as through Junior ISAs or Premium Bonds. It’s also possible to set up a child’s pension fund, with a 20% top up from the government (up to a maximum annual contribution).

Tax tips

If your estate is worth more than £325,000 on your death, part of it will be subject to Inheritance Tax (IHT) which is currently 40%. So, if you can, it’s worth taking advantage of the IHT exemptions available with lifetime planning.

One of the most tax efficient ways of passing on wealth is through gifts made out of surplus income. Many people are unaware of this, but these gifts can be considered outside IHT. In addition, costs related to family maintenance, such as education, are IHT exempt.

These exemptions are separate to your normal IHT allowance, which can double up if unused from the previous year.

The pitfalls

One of the main pitfalls around lifetime planning is record keeping. You must have evidence of any relevant financial planning and your intentions at the time, or you could miss out on sizeable exemptions.

Also, ensure that you have an up-to-date Will in place. An estimated two thirds of adults don’t and many die intestate, which can cause additional stress for families.

Lastly, tax legislation around IHT is complicated, so always seek professional advice when reviewing your options.

To find out more, please contact Calvin Healy.