Inheritance Tax  

How to carry out inter-generational planning

  • To ascertain what is important about IHT planning.
  • To understand how different investment types can help with IHT planning.
  • To learn what sort of investment strategies could help clients.

Within such a complex multigenerational group, individuals face a huge variety of personal circumstances. However, looking at some of the more common situations, a significant theme for cross-generational inheritance is supporting heirs while the individual is still alive in order to mitigate IHT.

It is also important to parents and grandparents that they can retain control of their money should their health or other circumstances change.

By understanding the needs of these diverse individuals, IFAs can then match them with both the well-known financial tools available and some that this group may not be aware of, such as Agricultural and Business Property Relief. 

Gifting and pension funds

While gifting assets under the seven-year rule is one of the best-known methods of mitigating IHT, research shows that only six per cent of over-55s are making gifts to family members.

This is partly because those suffering from ill health may worry they will not survive long enough for the relief to apply. Smaller gifts of up to £3,000 can be made every year, and there are other IHT-exempt gifts linked to weddings.

Individuals can also give away any number of small gifts of up to £250 each to any number of separate people. While these gifts are immediately exempt and may be an option for some, they make very little difference to the total value of the estate.

This aspect of gifts might be less attractive to those leaving larger inheritances. It also means the money is no longer available to the individual should their circumstances change. 

Additionally, few consumers are fully aware of the inheritance exemptions relating to pension funds. Unused private pension funds can be gifted tax-free to heirs, if the individual is under 75 when they die.

If someone is over 75, their heirs can use the pension pot to set up a pension for themselves, taxed at their own marginal rate.

Understanding the benefits of this is useful for grandparents looking to support their grandchildren after they die, and for parents looking to pass inheritance straight to their children rather than spouses.

This is especially true for those individuals who are in poor health as ensuring that the pension is left to a specific individual can be an effective way of leaving a large amount of money to a family member.

It also allows for that pension to continue to support the individual if needed.

Understanding the benefits of this rule is useful for all generations looking to mitigate IHT while retaining access to their money in the event of a medical emergency.