One of the main juggling acts for your clients thinking about retirement will be ensuring that they can live the life they want, whilst also leaving enough to pass onto their loved ones.
Whether they opt for ‘giving while living’ or plan to distribute their wealth on death, here are three intergenerational planning tips to help your clients pass wealth on tax-efficiently.
‘Giving while living’ is a movement that began in America. It aimed to encourage US billionaires to give some of their fortune away while they were still alive to see the benefits of their generosity.
One way for your clients to pass on their wealth while they are still alive is through gifting.
Many types of gifts can be made tax-free, but the Inheritance Tax (IHT) seven-year rule still applies.
If an estate is valued at over £325,000 on death, any gifts made within the seven years before death could be liable for a tax charge. IHT is charged at 40% on gifts given in the three years before death, and on a sliding scale from three to seven years.
|Years between gift and death||Tax payable|
|Less than 3||40%|
|3 to 4||32%|
|4 to 5||24%|
|5 to 6||16%|
|6 to 7||8%|
|7 or more||0%|
Your clients can make small gifts during their lifetime without there being any IHT to pay.
HMRC rules allow your clients to make as many gifts of up to £250 per person as they like within a single tax year (as long as no other exemptions have been used on the same person).
There’s no IHT payable on gifts made to a spouse or civil partner. Your clients can gift as much as they like during their lifetime, as long as their partner lives in the UK permanently.
Each tax year, your clients can also give a wedding or civil ceremony gift of up to £1,000 per person. This figure rises to £2,500 for a grandchild or great-grandchild, and £5,000 for a child.
The normal expenditure out of income exemption allows your clients to make regular gifts, as long as they can prove the gifts are regular, and that making them does not affect their standard of living.
This exemption can be used to fund life policies, make pension contributions on behalf of a child, or make regular gifts into a trust, for example.
Your clients can give away £3,000 worth of gifts in the 2020/21 tax year without them counting toward the value of their estate.
Any unused annual exemption can be carried forward to the next year. Making use of this exemption is a great way to lessen a potential IHT liability on death, allowing your clients to give tax-free while living (and subject to the seven-year rule).
2. Using a pension
The lead-up to retirement can seem lengthy Most of your clients will have been saving towards it for decades. If they can afford to though, they might consider not taking their pension at all.
This is a big decision and we’d certainly recommend speaking to us first. It relies on your client having sufficient funds elsewhere to fund their retirement, either from other pensions, investments, or regular income from Buy to Let properties for example.
Keeping a pension invested at retirement means it can potentially continue to make gains. More importantly, your client might be able to pass any unused pot onto their children in a tax-efficient way on death.
If death occurs before the age of 75, any unused pension pot stays outside of a client’s estate. The fund is not included in any IHT calculations and 100% of it can be passed on free of tax. On death after the age of 75, the chosen beneficiary will pay tax at their marginal rate.
Choosing a beneficiary is done through the pension provider rather than via a will.
This could be a great option for clients with additional income streams or multiple pensions. It would allow them to set a pension aside specifically to pass on to a chosen beneficiary, contributing without any intention of taking it on retirement.
If a client’s financial position means they have to take their pension, they might consider withdrawing only what they need, leaving some unused pot to pass on, or taking their pension once all other funds have been used.
3. Through a will
Recent research suggests that more than half of UK adults don’t have a will.
A will is the easiest way for your clients to make their wishes known and to ensure that their estate is divided in a way that aligns with their wishes.
Dying without a will in place leaves an estate subject to the rules of intestacy. Neither your client nor those left behind have any say over how assets are distributed. This can lead to conflict and additional expense for grieving loved ones.
Having a will in place is essential, but it is also vital that it is up to date. Big life events can alter plans and shift priorities and a will must always reflect the wishes of your client.
Get in touch
We can help your clients put long-term financial plans in place that allow them to live their desired lifestyle, whilst knowing that they are looking after their loved ones now and in the future.
If you have clients who would benefit from help in managing their estate and understanding the impact of IHT on their wealth, please get in touch with us. Email firstname.lastname@example.org or call 0116 2407070.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
“At Boolers, you know that things will be dealt with properly and professionally. A real safe pair of hands!”
“I have always found the quality of advice, technical knowledge and level of service is second to none. ”
“Thank you to all of you for such a wonderfully smooth transaction! Hope we can do it again some time.”
“Boolers provided excellent advice when we needed it most.”
“Boolers have provided myself, family and business with pension and investment advice for over 30 years and continue to provide a high quality professional service to us all on an ongoing basis.”
“Chris Ball has been our Financial Adviser for many years and, from the start, we have been impressed with his strategic sense, his deep knowledge and his skills in helping us build our own successful retirement. He understands our aims and how to achieve them and has taken great care of us throughout. ”