After years of planning for your retirement, there will come a point when the so-called ‘active’ phase is over. You’ll move into the stable phase and you might start giving serious consideration – if you haven’t already – to the money you’d like to leave behind after you’re gone.
If you have sufficient funds to be able to leave a portion of your wealth to the next generation, you’ll want to do so in a tax-efficient way.
HMRC exemptions will allow you to make tax-free gifts during your lifetime. You might also consider writing life insurances into trust or using your accumulated pension wealth.
Here are three tax-efficient ways to pass your wealth on to your loved ones.
1. Use your pension
Your pension is designed to provide you with an income in retirement, but if you have other sources of income you might consider using your pension as a means of passing wealth on to the next generation tax-efficiently.
Once you take money out of your pension it forms part of your estate for Inheritance Tax (IHT) purposes. Unused pension funds, though, don’t.
By taking a sustainable amount from your pension you might leave an unused pension pot to transfer to the next generation. If you have additional money coming in – from investments or Buy to Let property, for example – you might consider not taking your pension at all.
At the least, you might think about accessing your pension last, and only if you need to.
You could pass 100% of your unused pension pot on to the next generation, in certain circumstances.
If you die before age 75, unused pension funds can be passed on to a chosen beneficiary, normally tax-free. If you die after age 75, your beneficiary will be liable to Income Tax at their marginal rate, but this could still be less than they’d pay in IHT.
It’s worth noting that your beneficiary is chosen through your pension provider rather than via your will. Contact your provider to find out whether you currently have a beneficiary listed and add one if not.
2. HMRC gifting rules
HMRC gifting rules and exemptions allow you to make tax-free gifts during your lifetime. The three main exemptions are:
- Gifts up to £250
You can give small gifts of up to £250 per individual during a single tax year. You might use this to cover birthday or Christmas presents.
You can also give unlimited gifts to your spouse or civil partner tax-free. Gifts must be made during your lifetime and your partner must be a permanent UK resident.
- Exempted gifts
The ‘annual exemption’ allows you to give up to £3,000 as a gift, during a single tax year, without those gifts counting toward the value of your estate for IHT purposes.
The allowance is per individual and can be carried forward for one year. This means that a couple could gift up to £6,000 in a single tax year, rising to £12,000 if neither party used their annual exemption in the previous tax year.
- Normal expenditure out of income
You can make regular gifts using the normal expenditure out of income exemption. As long as the gift is made regularly and it doesn’t detrimentally affect your standard of living, the gifts will be tax-free in most cases.
This exemption could be used to pay life policy premiums, make pension contributions for a family member, or pay regularly into a trust.
HMRC will check that their criteria are met so be sure that you keep them in mind.
For example, if you make regular annual payments into a loved one’s trust, be sure to only make one payment per tax-year. Two payments in one tax year with none the following year might not satisfy HMRC’s ‘regular payment’ criteria.
3. Using a trust
Holding money in a trust takes that amount out of your estate for IHT purposes.
A trust is a legal arrangement that lets you leave assets to beneficiaries you choose. The trust is then managed by trustees until it is paid out to the beneficiaries, either on your death or on another date that you specify.
As well as IHT benefits, a trust also gives you control over your assets and allows your loved ones to gain faster access to the money after you’re gone.
Different types of trust exist, and they are legally binding documents that can be complex. Speak to us if you’d like to discuss trust options.