How to assist your youngsters and lower inheritance tax

Three quarters of people think that their children will be worse off in the future than they are now, research claims.

But despite these fears among 74 per cent of parents, just 14 per cent of respondents said they regularly discussed money and inheritance with their children, according to a study by private bank Arbuthnot Latham.

And only a quarter, 26 per cent, said they had taken steps to reduce the amount of inheritance tax that their children will pay when they die.

Worrying future: Most parents think that their children won’t be able to afford the same lifestyle as them

Rachel Wyatt, wealth planner at Arbuthnot Latham, said: ‘Many people feel uncomfortable talking in any detail about inheritance and too often it’s not discussed. The danger with this approach is no-one achieves their desired outcomes.’

‘Conversations about passing down wealth are crucial in achieving the outcome you want.’

She added: ‘We always encourage clients to have open and honest conversations with their children and grandchildren. This ensures that wishes are followed, and it also allows future generations to plan for their own financial future.’

It is becoming increasingly likely that younger people will not be able to match the financial quality of life that their parents have enjoyed.

According to Arbuthnot Latham, its survey calls into question the ‘age-old perception that younger generations will always be better off than their parents due to long-standing trends of economic growth and improving standards of living.’

Over the past few decades, house prices have outstripped wage growth, while the cost of living has continued to grow. Recent data shows that a third of first-time buyers are reliant on their parents to help them to get on the property ladder.

As a result, fewer younger people are buying houses, let alone at similar ages to when their parents were able to, while a larger number of people are living at home with their parents.

In 2021’s census, as many as 11.6 per cent of those between 30 and 34 were living at home, compared with 8.6 per cent ten years prior.

However, with younger people increasingly reliant on money from their parents, it is integral for those that intend to leave an inheritance to have a plan in place to ensure that their children can make the most of it.

Wyatt said: ‘Without proper estate planning, your beneficiaries are kept in the dark and this can result in relationship tensions due to uncertainty and an inability for them to plan efficiently. An estate plan gives you the tools to have a proper conversation.

‘Whether it’s making lifetime gifts or thinking of how your estate will pass to your beneficiaries on death, there are steps you can take to mitigate IHT. The right solution will depend on your appetite for making lifetime gifts and the control you want to retain over that gift.’

How can you reduce inheritance tax?

Reducing the effects of inheritance tax can provide a massive boost to the amount that you are able to leave your loved ones. There are a number of ways to go about this.

If you are looking to help your children out as soon as possible, you can make use of gifting. You are entitled to an annual gifting allowance of £3,000, as well as £5,000 to a child when they get married or enter a civil partnership.

You can also give gifts of up to £250 per person each tax year, provided that you haven’t used another allowance on them.

One thing to note, however, is that these allowances are only tax-free if you live for seven years after the gift was given. If you don’t, inheritance tax is payable on a sliding scale depending on how much time elapsed between the the gift being given and your death. 

Alternatively, you can place money into a trust, which will reduce the amount of tax your children will pay when they receive the it. Appointing yourself as a trustee and writing a letter of wishes will allow you to set out how you would like the money to be distributed.

Investing in a self-invested private pension or Sipp can also prove a wise investment, as they sit outside your estate and are not subject to inheritance tax.

On top of this, if you die before the age of 75, your children will not pay income tax on the drawdown of the pension fund.

Pensions are also one of the most efficient ways of saving, as your funds will be subject to 20 per cent tax relief.

‘At a tax rate of 40 per cent, HMRC can be the largest beneficiary of your estate, making IHT mitigation important to many in making those plans,’ Wyatt said.