Passing savings to children to minimise Inheritance Tax

harrypeters

I appreciate the risks involved (eg divorce, bankruptcy, family fallouts etc etc) but taking those into account I'm still concerned at my children/grandchildren losing 40% of my asssets over and above the exemption limits after I've popped my clogs.



Seems such a waste, when just handing some of the assets over now (leaving the house out of it because it's likely to be covered by the Residence Nil Rate Band) would reduce the IHT to nil.


How best to do it though? Cash/bank savings are easy, but some is held in Savings Certificates, some in Premium Bonds and some in Stocks and Share ISAs. I'd aim to leave as much as possible in the ISAs for their tax efficiency, transferring other assets first.


Premium Bonds are simple enough - cash in. Savings Certificates less straightforward because they're index-linked and can't be repurchased.


Any thoughts as to how a declaration of trust might work re the Savings Certificates (or other assets for that matter) - simply stating that they're now held on trust for Child A? That way they stay invested as they are, but don't form part of my estate because the beneficial interest belongs to Child A.


Too simplistic? All solutions and recommendations gratefully received!

bostonerimus

The inheritance tax advantages of trusts aren't what they used to be....I think you pay tax on the way in and then the 7 year clock starts ticking to see if there's more tax to pay.

If you are married your spouse can "inherit" you inheritance tax allowance so this year with that and the property allowance almost £1M can be pass on to your children without tax. Other than that I would use your gift allowances and if you are in good health maybe make some larger lump sum gifts and hope you live longer than 7 years.

You might also want to give/leave money to charity.

18cc

You can give as much as you want when you want completely tax free to your children, with the proviso that if you die within 7 years there will be (some) inheritance tax to pay. If you survive 7 years then no tax payable.

If you decide to do this by means other than eg cash then I recommend you get advice, particularly where trusts are concerned.

Simplest is to cash the lot in and give them the money by cheque or whatever and then start the clock ticking.

Since your inheritance tax allowance is assigned to the oldest gift first, if you die within the 7 years the gifts will then be taxed using up your allowance meaning your home may be taxed depending on the amounts left etc of course.

This can be annoying to say the least. Say you gave your children £200k and waited 6 years and then gave them another 200k. Then died. Your allowance would be used on the first gift first, but this might not be what you want because as it is 6 years old you would pay less tax anyway than on the second gift. Watch out for traps.

newatc

Assuming you are married, the best way would be to give £6k annually away to your children/grandchildren which has no impact. You can give more of course but that may become victim of the 7 year limit.
I keep away from trusts which are always subject to having laws changed or possibility of poor financial advice. I'd rather the government get it than the Finance Industry.

Doc_N

Some concern, understandably, about the use of trusts, which can create quite a few problems along the way.

The trusts you seem to have in mind, though, look to be bare trusts, and these don't have the same complications. No IHT charges on setting up the trust, or at any anniversary or exit points, unlike most types of trust.

"Bare trusts

Bare trusts are simple trusts used to hold assets on another person's behalf until they choose to take ownership.

For example, bare trusts are used to hold assets for a child to ensure they don't use them until they're grown up. These types of trusts don't follow these inheritance tax rules.

Instead, assets placed in a bare trust are treated as potentially exempt transfers.

You'll pay no IHT when establishing the trust, but if you die within seven years of creating it, it will be taxed as part of your estate."


Looks like a possibility, if you're trying to avoid cashing in things like savings certificates.

gpl_2

Disclaimer: I'm an accountant working in the estate planning industry.


Please pay for advice from a qualified, regulated and insured advisor. The fees will be a fraction of the IHT at stake



There are many IHT mitigation strategies that could assist you, while leaving you in control, please don't use simple gifting until you have considered the alternatives.


Discretionary trusts may be part of the solution, there is no lifetime IHT if you settle less than £325,000 per settlor every seven years.

dmelife

All the above posts have either incorrect or incomplete information. Please get some advice from someone qualified to provide it.

You may consider:

Exempt gifts including gifts from excess income
PETs
Lifetime gifts
Trusts including gift and loan, discounted gift, bare etc
Whole of life policy
BPR investments

bostonerimus

If simple gifting and using the full amount of your allowances will get you where you need to be why would you need to pay for anything more? If it doesn’t, then look at more involved solutions, but don’t complicate life unnecessarily.

I would not consider things like BPR unless you are financially sophisticated and understand them fully yourself.

bostonerimus

Does something like a discretionary trust have any IHT tax advantages over a straight gift? Or is their utility mostly for managing money for minors and other people not able to take financial responsibility? Does those cost and extra administrative burden make them less attractive than a straight gift?

Keep_pedalling

bostonerimus wrote: »

Does something like a discretionary trust have any IHT tax advantages over a straight gift? Or is their utility mostly for managing money for minors and other people not able to take financial responsibility? Does those cost and extra administrative burden make them less attractive than a straight gift?

No advantage if the gift is purely for adult children. Personally I would only ever gift cash it gives them the most flexibility to spend or invest to meet their needs.

Providing the OP and his wife are in good health the best way to cover the risk of a premature death is to take out term life insurance that will pay any IHT resulting from a death within 7 years.

bostonerimus

Keep_pedalling wrote: »

No advantage if the gift is purely for adult children. Personally I would only ever gift cash it gives them the most flexibility to spend or invest to meet their needs.

Providing the OP and his wife are in good health the best way to cover the risk of a premature death is to take out term life insurance that will pay any IHT resulting from a death within 7 years.

That's what I was thinking. A whole life policy seems to be unnecessarily expensive when all you need to do is to insure for IHT taxes due on death within 7 years of the gift, so a less expensive term policy and gifting seems appropriate. Of course this needs you to actually gift the money. I've always avoided whole life because of the high premiums and you have to keep paying them until you die and that might become a burden as you get older. Just give the kids lump sums and take out inexpensive term life insurance for 7 years to pay for the tax bill if you die within 7 years of the gifts.