Passing wealth to your kids: Four strategies to explore

It’s only natural for parents to think about the financial well-being of their children, so it’s little wonder that so many of us are eager to look for new ways to pass on our wealth ahead of the upcoming changes to Inheritance Tax (IHT) calculations. 

From April 2027, leftover private pensions will be included in IHT calculations, making it more likely that the money we leave for our loved ones will trigger a 40% tax rate. 

Inheritance Tax rules stipulate that estates above £325,000, or £500,000 if a home is left to children or grandchildren, will be taxed. For parents, this means that it could pay to make a decision about passing your wealth to your children with the future in mind. 

Whether you’re a young parent thinking about the future or are already at retirement age and seeking to formulate a strategy to help your loved ones out the most, there are plenty of options that you can take to pass your wealth on to your kids effectively. 

Factoring in circumstances like your individual needs, financial goals, and tax considerations, let’s take a look at four strategies for passing down your wealth that are worth exploring: 

1. Lifetime gifting

The best way to get started in passing your wealth to your children is by gifting money to them while you’re alive. This approach can help to lower the size of your estate for IHT purposes, ensuring that more of your wealth stays within the family. 

UK tax residents can gift up to £3,000 annually without it being added to your estate. While larger gifts can be made each year, they will only be completely exempt from Inheritance Tax if you survive for seven years after gifting them, meaning that it may be an effective strategy if you’re planning to get started at a younger age. 

There are many different approaches you can take when gifting money, but it’s worth maintaining detailed records of any gifts you’ve handed to your children, as this can help to simplify the process for your executors after your death. 

2. Make use of trusts

Trusts are another powerful tool when it comes to transferring wealth and maintaining a degree of control in protecting your assets from risks like creditors, divorce, or irresponsible spending. 

Different types of trust are available with different perks for passing your wealth to your kids. One example is a bare trust, which offers simplicity with assets becoming fully accessible for your children once they become adults. Elsewhere, discretionary trusts provide more control over when and how assets are distributed to your kids. 

However, it’s also important to note that gifts to trusts can carry different IHT implications than direct gifts, so it could be worth seeking the help of a financial adviser to see how your estate would be impacted by this strategy. 

3. Open a JISA for your kids

If your children are younger than 18, opening a Junior ISA (JISA) for them can be a great way of allowing you to transfer your wealth gradually on a tax-free basis.

Junior ISAs offer a tax-free allowance of £9,000 per year, which can be accessed once your child turns 18 years of age. You also have the freedom to choose whether to save money for your kids in a Cash ISA or invest it in a Stocks and Shares ISA. 

The great thing about JISAs is that anyone can contribute to them, meaning that if you’re a grandparent looking to support your children by ensuring that your grandchildren are well-supported as they grow up, you can gift money to them by directly contributing to their Junior ISA as long as the combined contributions stay below the £9,000 annual allowance. 

Alternatively, children’s pensions can be another effective way of providing a tax-free way of saving for retirement, although your money won’t be accessible until your loved ones eventually retire. 

4. Make a will

Of course, the traditional way to pass your wealth on to your kids is to create a will and ensure that all of your assets are distributed according to your wishes. If your estate is a little more complex with different properties and high-value items, it makes sense to write a will to ensure that there are no disagreements between beneficiaries later on. 

Setting up a will also allows you to appoint guardians for minors and can include provisions for setting up trusts on their behalf. 

Here, proper estate planning can really help to lower your Inheritance Tax liabilities early on, and your will would be most tax-efficient if you use it to guide a gifting strategy earlier on in life. 

Planning for the future

It can be difficult to undertake estate planning, but there are plenty of Inheritance Tax benefits that you can unlock by getting started early in transferring your wealth to your children. 

Whether you gift your money to them early on or make use of trusts to help ease the size of your estate later down the line, be sure to look for a strategy that you’re comfortable with and that can help to ease your IHT obligations in the future.

 

The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any finance decisions. Appropriate independent advice should be obtained before making any such decision. London Loves Business bears no responsibility for any gains or losses.