Lowes Inheritance Guide

Passing on Your Wealth: Key Considerations

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LOWES INHERITANCE GUIDE

What to consider when you’re thinking about passing on your wealth

There often comes a time in life when we think about the inevitable and passing on money to our family. Inheritance planning requires careful consideration, to make the most of your hard-earned wealth.

Increasingly, as a result of living longer lives, we find that gifts are made during lifetimes, rather than waiting until death to pass on an inheritance. This approach can bring with it a lot of benefits, but it needs to be carefully planned so you pass on money efficiently and leave enough behind for your own needs. It’s important to minimise the amount of tax you pay when you die, not creating an unnecessary tax bill for your children or grandchildren. Remember that inheritance tax planning is only one small aspect of ensuring a successful transition of wealth from one generation to the next.

We’ve written this guide to cover 7 of the most important things to consider when you’re thinking about passing on your wealth. Successful inheritance planning means thinking about all of these areas and making clear decisions designed to satisfy your overall financial goals in life. Before reading this guide, it’s essential to have a good understanding of your current financial position, especially what you own (your assets) and what you owe (any debts).

We hope you find this guide informative.

If you would like to discuss your inheritance plans and how Lowes Financial Management can help, please do call us on 0191 281 8811 or email Enquiry@Lowes.co.uk to arrange a free initial consultation with a Lowes Adviser.

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1 Keep enough for yourself

We’re all living, on average, for much longer; mortality rates in the UK have been on the decline since the 19th century. It is estimated that one in three babies born today will live to celebrate their 100th birthdays.

With these increasingly longer lives comes a desire to gift money to the next generation during our lifetimes, rather than waiting until death to leave a more traditional inheritance. Living for longer can result in higher costs, especially in the later stages of retirement when care fees become an essential consideration. An estimated 4 million older people in the UK, which is around half of over 65s, have care needs of some form. Before paying an early inheritance to the next generation, it’s essential to make sure you keep enough money for yourself. The ability to maintain your desired lifestyle in retirement, especially in later life, should take priority over giving money to children or grandchildren during your lifetime.

One very effective way to approach this challenge is to work with a Lowes Adviser to create a lifetime cash flow forecast. This forecast is a method we use to help our clients understand what their income and assets might look like in the future. As part of this process, we can include different scenarios and demonstrate the likely impact of these, for example, making a specific gift during your life to the next generation. It relies on making a set of reasonable assumptions about the future, as well as keeping the forecast under regular review each year, to adjust the assumptions as they change over time. This approach of carefully considering the long-term financial impact of any gifts you choose to make helps to provide a degree of peace of mind that you can genuinely afford to gift money, without running out of funds, before the end of your life.

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2 Gift or loan?

When it comes to passing on wealth to the next generation, there are two broad approaches to consider; giving money away as a gift, or making a loan. Both ways of giving an inheritance during your lifetime have advantages and disadvantages to consider. There are also some important tax considerations.

With incredibly high property prices, it’s no surprise that adults often turn to ‘the Bank of Mum and Dad’ for financial support. Making a gift to adult children can be subject to a 40% tax charge, depending on when the person making the gift subsequently dies. Gifts tend to be classified as a Potentially Exempt Transfer, commonly referred to as PET. A common misconception is that this form of gift reduces the tax charge applied to the gift, on a sliding scale, over seven years from the date the gift is made via a dispensation called taper relief. Taper relief, however, only has a benefit where the gifts are significant to the extent that they together with other gifts, exceed the inheritance tax nil rate band (NRB) which is currently £325,000. Where this is the case if the person making the gift dies within three years, then the 40% tax charge applies, but the effective tax charge reduces to 32% after three years, and then down to 8% after six years, before falling to zero after seven years. Where total gifts are below the nil rate band, the seven year clock is still important

as gifts (beyond specific exemptions covered later in this guide) will potentially use up some of the nil rate band. An alternative to gifting money is to make a loan. This approach can come with the hope of receiving a repayment at some point, and means you get to keep some control of the money, rather than giving it away entirely. A loan could still count towards inheritance tax, as it will be included as part of your taxable estate when you die. It is possible to start as a loan, later waiving the debt and making a gift, but be aware that the seven-year clock starts ticking from this point for tax purposes. When lending money instead of gifting, it’s essential to make it very clear to all parties involved that the money is a loan. It’s better to think at the outset about all possible outcomes, including if your children cannot afford to make repayments. Always get this in writing to make the terms and any conditions very clear. Having a written agreement in place is also very helpful when it comes to subsequent estate management.

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3 Keep it in the family

Conversations within families about money matters, especially as they relate to end-of-life planning, can be tough. Sibling squabbles around inheritance are unfortunately quite common, with questions of ‘fairness’ arising, especially when details come as a surprise.

Inheritance is often an emotional subject, with money matters to deal with during the grieving process. By having open and honest discussions with your children and other potential beneficiaries, it’s possible to set the scene for what is going to happen and preserve family harmony in the future. Money remains a taboo subject within many families, especially where parents are part of the post-war baby boomer generation, growing up in an environment where it was often considered impolite to talk about financial issues. Getting members of the family to sit around the dining room table to talk openly about your plans for future inheritance is a positive step. Fairness doesn’t necessarily mean equality, so explaining your rationale can help reduce the sting of any unequal payments to come. Unequal inheritances can arise due to the presence of children from previous relationships, or the provision of earlier financial support to one or more siblings, with inheritance in a will then designed to make things more equal.

Having conversations on a one-to-one basis, in the first instance, can help before coming together as a group. This reduces the chances of unwelcome surprises during a family dinner. Always keep in mind that your children, once adults, are responsible for their own financial lives. Any inheritance they receive is a privilege, not a right. If you’re in the fortunate position of being able to leave a substantial legacy to the next generation, either during your lifetime or on death, then it’s even more important to teach your children the value of financial independence. You can involve a Lowes Adviser in these family discussions. Having an impartial third party mediator at family meetings can help to reduce levels of emotion, keeping all involved focused on the critical issues at hand.

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4 Trusts

Putting money or property in a trust involves using a legal instrument to attach certain conditions to the assets. It can be an excellent way to reduce a future inheritance tax bill, however, trusts are sometimes complex and therefore it is essential to take professional advice.

A trust involves giving property (which can be cash, investments or property) to someone to look after on behalf of someone else. They require a donor (the person making the gift into the trust), a trustee (responsible for managing the trust properly), and a beneficiary (who ultimately benefits from the money in the trust). When you put money into a trust, it no longer belongs to you, which means it usually doesn’t count towards the value of your estate for future inheritance tax purposes. Trusts are also a very effective way to keep control of wealth, for the chosen beneficiary or beneficiaries. It places a legal obligation on the trustees to look after the assets in the trust for the person or people who will ultimately benefit.

In addition to the tax efficiency that can be obtained by using a trust, they are also instrumental in making sure any money goes to the intended recipient. A good example is where the money is left to an adult child who is married at the time, but subsequently separates from their partner. If money is left to them in trust, it can be kept out of any financial settlement on divorce, ensuring it stays within the family as intended. There are several different types of trust, and the most suitable type for your inheritance tax planning will, of course, depend on your circumstances, goals and objectives. This is where specialist advice from a Lowes Adviser is vital, so you choose the best possible trust arrangement as part of your broader inheritance tax planning.

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5 Update your will

Having a valid will in place is an essential aspect of inheritance tax planning. After you write your will, you need to make sure it remains up to date, so it continues to reflect your current wishes.

Several life events should prompt you to review and update you will. These life events include the death of someone named as an executor or beneficiary in your will, divorce or marriage, and any significant changes to the value of your estate. Regardless of whether significant life events take place, it’s good practice to review and update your will periodically, regardless. If several years have passed since you last reviewed the terms of your will, that’s a good reason to take it out and check it remains up to date. If you need to update your will, you can sign a new will which revokes the earlier one, or add what’s known as a codicil to your existing will. The best approach will depend on what you’re trying to achieve with the update, so specialist advice is required.

Whichever approach you decide to take, don’t attempt to edit your existing will by crossing things out and writing notes in the margins; this approach is a good recipe for future confusion, which could lead to higher costs and family arguments. When you review and update your will, use it as an opportunity to put it in a safe place. There’s little value in having a will in place if your chosen executor can’t find it when you die! Tell them where your will is stored and put these details in writing, so they are not forgotten. In England and Wales, you can lodge your will with the Probate Service, for a flat fee of £20. If you keep your will at home, leave clear instructions for your executors so they can find it in the event of your death.

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6 Leaving a legacy

In addition to leaving money to family or friends, inheritance planning is an excellent prompt to consider whether you would like to leave a legacy to charity, political party, or good cause.

As well as doing something positive for a cause you feel passionately about, leaving money in your will to a charity can help reduce an inheritance tax bill, or even wipe out the tax bill entirely. When you leave money to a UK registered charity in your will, the value of the gift doesn’t count towards the value of your IHT chargeable ‘net estate’ estate for inheritance tax purposes. By leaving a charitable legacy of at least 10% of your ‘net estate’ value, you effectively reduce your inheritance tax bill on the remaining amount of your estate from 40% to 36%. By leaving money in your will to a charity means your other beneficiaries receive slightly less money when you die. It’s possible to leave money to specific, named charities in your will. When doing this, always include their charity registration numbers, to avoid the risk of any confusion.

Alternatively, instead of naming specific charities, you can leave it to the executors of your will to allocate the money to charity, but make sure you give them clear instructions to help them make the right decision. Your charitable legacy can take several forms; it might be a specific cash amount, a particular asset you own, or a proportion of the value of what’s left in your estate after taxes and charges have been paid. Keep in mind that The Inheritance Tax Act 1975 says you need to make suitable provision for any financial dependents in your will, before giving money away to charities. If this happens, your family could contest any charitable gift made in your will, so they can obtain the financial provision to which they are entitled. It’s essential to seek professional advice when deciding whether to leave a charitable legacy and how this fits into your overall inheritance planning.

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7 Life assurance

What on earth does life assurance have to do with inheritance tax planning and passing on your wealth?

Life assurance has long been a popular choice as a way to pay for an inheritance tax bill. By calculating the likely tax bill faced by your children or grandchildren, you can put in place life cover for the equivalent amount, so they can use this payout to cover the tax bill. The first step to consider is whether or not you need any life assurance in place, to pay for a future inheritance tax bill. This means calculating the tax charge that would apply if you died tomorrow and thinking about how this might change in the future. With the main residence nil-rate band now in place, a shrinking amount of wealth is subjected to the 40% inheritance tax bill. In fact, from April 2020, you have been able to pass on £500,000 tax-free to the next generation, assuming you are leaving behind your main residence to direct descendants.

This means inheritance tax, in addition to putting in place life assurance to cover the tax bill, is increasingly a concern for wealthier individuals and couples - but always check to confirm your circumstances. This is where working with a Lowes Adviser can help. If you do want to put some life cover in place for the purpose, a popular option is a guaranteed whole of assurance policy. The premiums on these policies are fixed for life and unlike term assurance, they have no fixed term. When using life assurance for inheritance tax planning, the policy needs to be written in a suitable trust, to prevent any benefit from adding to your taxable estate and therefore increasing your tax bill. Life assurance can play a useful role in passing on your wealth if other options to reducing a future inheritance tax bill prove to be unsuitable. A life assurance option isn’t always simple, so make sure you seek professional advice.

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Checklist

Within this guide, we’ve given you seven things to think about when you’re thinking about passing on your wealth to the next generation.

1

Keep enough for yourself - Any decisions about estate planning should start with a comprehensive financial plan, to ensure that you will have enough money left to meet your financial objectives, especially in later life.

2

Gift or Loan? - If you’re giving money to the next generation during your lifetime, rather than passing it on through your will when you die, you should weigh up the pros and cons of gifts and loans.

3

Keep it in the family - It’s good to talk! Having honest discussions with your children about how you plan to pass on wealth is a very effective way to avoid future family disputes.

4

Trusts - These legal instruments can be a very effective way to reduce future tax bills, and pass on the money to the right people, at the right time.

5

Update your will - Having an out-of-date will is almost as bad as having no will at all. Keep your will periodically updated and make sure you tell the relevant people where they can find a copy!

6

Leaving a legacy - If you’re going to leave money to a charity in your will, make sure you get it right.

7

Life Assurance - Life assurance can play a useful role in covering a future inheritance tax bill. Speak to a Lowes Adviser first though, to work out how much life cover you need and the most suitable way to put it in place.

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About Lowes Financial Management

As one of the longest standing Independent Financial Advisers in the UK, we have been providing sound Independent Financial Advice to our clients and their families for generations.

Our team of highly qualified Advisers, Analysts and support staff collectively implement our personal approach to financial planning enabling us to help clients build, protect and pass on their wealth. As one of the largest privately owned Chartered Independent Financial Advisers in the UK, we have been building successful long-term relationships with clients for over 50 years.

The keystone upon which Lowes and its clients have prospered is our personal approach to financial planning, enabling us to help clients with their goals to build and ultimately protect their wealth. Lowes has almost £1bn assets under management and over 97% of clients said they would recommend Lowes services to friends, colleagues or relatives in our most recent biennial client satisfaction survey (2023). As well as providing inheritance and legacy solutions, Lowes can advise on investments, pensions, long term care and other general financial planning matters.

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As Independent Financial Advisers we provide you with an unbiased, whole of market guidance and market insight in order for you to make the best and most informed financial decisions to suit your individual circumstances.

We know that financial matters can be challenging throughout our life stages. It’s important to sit down with a Lowes Adviser as we are here to help guide you through it.

To arrange a free initial consultation with a Lowes Adviser: Call: 0191 281 8811 | Visit: Lowes.co.uk | Email: enquiry@Lowes.co.uk

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