Keep it in the family with smart tax planning

We look at the best ways of helping your loved ones benefit from your wealth after you’ve gone by cutting your estate’s tax bill.

There comes a point in life when thoughts turn to what happens after we’re gone. For those with children and grandchildren, in particular, this will likely include considering how best to pass on any assets we may have.

You might therefore be working out what you can do now to make life easier for your family, how you can give younger generations a helping hand and what you need to put in place for your own peace of mind. All of this could now have new significance as a result of the pandemic and its effect on our circumstances, objectives and plans.

But, whatever your specific aims, making the best of later life while also planning for your family’s future is an area where tax allowances and reliefs can make a bigger difference than you might expect.

The importance of planning

The process of making sure that your beneficiaries can get the best from the assets you leave behind will often begin with Inheritance Tax (IHT) planning.

While only a minority of estates pay IHT, the 40% tax charged on assets above the nil-rate band, (currently £325,000 / there’s also a main-residence nil-rate band, currently £175,000, an exemption for your own home when it’s passed onto a direct descendant), makes it a risk not worth taking. When you’ve spent your working life building up your assets, you’ll most likely want to protect them for the benefit of future generations. This is an area where pensions play a much more central role than they used to.

“When you’re trying to come up with a plan for passing on wealth, traditionally it’s about trusts, property and so on,” says Tony Clark, Senior Propositions Manager at St. James’s Place. “But people are increasingly using their pension pots, and some are using them to skip generations.”

A pension has long been one of the most tax-efficient ways to pass on wealth, even more so after changes to pension rules in 2015. Your pensions sit outside your estate for IHT purposes, meaning your beneficiaries can access your savings without having to pay any IHT.

If you die before you turn 75 and you haven’t accessed your pension, your beneficiaries can receive all of it tax free, provided they claim it within two years of your death. If you die before 75 and you’ve been using a drawdown arrangement, your beneficiaries can access what’s left and decide how they want to use it. If you die after turning 75, your beneficiaries will be charged Income Tax at their marginal rate on any pension you leave behind (and it’ll be passed on tax free if the beneficiary doesn’t pay any Income Tax).

Making the most of ISAs and gifting

If you’re planning to pass on as much of your pension as possible, you’ll need to consider where else you get your income from in retirement.

“You might be making more of your ISA allowances and taking income from those to create retirement wealth,” says Tony. Remember, however, that while ISAs offer shelter from Income Tax and Capital Gains Tax (CGT), the money you hold in them will form part of your estate for IHT purposes.

The tax system is also your friend when it comes to helping younger generations while you’re still alive. For example, you can give away a total of £3,000 worth of gifts each tax year without them being added to the value of your estate (and you can use the previous year’s allowance, too, if you haven’t already). Similarly, small gifts of up to £250 can be given free of IHT during a tax year to any number of people who haven’t also benefited from your £3,000 annual exemption.

“This is money you can give away while still alive in order to reduce the IHT bill, so it should be part of your end-of-year tax planning,” says Tony.

It’s worth keeping a record of any gifts in case you or your beneficiaries need to provide paperwork for HMRC.

You can also maximise the benefits of financial gifts to children or grandchildren by putting the money into a children’s pension. “This is a win-win, as you get both the IHT reduction and the tax relief on pension contributions,” says Tony.

Practical and emotional support

This is an area where you can really benefit from the insight, knowledge and experience of a professional adviser. There’s a lot to consider – the wide range of options available, continual changes to tax rules, the complexity of certain aspects of IHT and the emotional challenge of considering what to leave behind when you’re gone.

“Retirement continues to change, with implications for how inheritance planning works,” says Tony. “Advice is especially crucial here to balance your own needs and those of your loved ones.”

Take control and give you and your family choices. Get in touchwith us today. 

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Sovereign Wealth Limited is an Appointed Representative of and represents only St. James’s Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority) for the purpose of advising solely on the group’s wealth management products and services, more details of which are set out on the group’s website Sovereign Wealth Limited is a Limited company registered in England and Wales, Number 07115386. The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.