The inheritance dilemma: to bequeath or spend?


After years of hard work and careful saving, you might be looking forward to spending the wealth you’ve built up on a comfortable, relaxing retirement.

On the other hand, you may also want to keep some of the money you’ve saved and eventually hand it down to your loved ones.

The question for many retirees is how to strike a balance between the two, making the most of your retirement while also having a substantial inheritance to pass on.

A report by the Institute for Fiscal Studies (IFS) found the majority of pensioners tend not to spend their wealth, and are instead more likely to bequeath it.

The average retiree is expected to draw down only 17% of their wealth between ages 70 and 80, and 31% between ages 70 and 90.

Outside of a pension pot, house values count for the largest part of most pensioners’ wealth, with 80% of over-50s owning their own home, worth an average of £150,000.

Most homeowners aren’t moving house or accessing this wealth, instead passing their home on as part of their estate.

Rowena Crawford, associate director at the IFS, said:

“The majority of homeowners do not move or access their housing wealth, and even financial wealth is drawn down only slowly.

“This means most wealth held by retired people is likely to be bequeathed to future generations, rather than spent.

“This will have implications for the level and distribution of resources among current working age individuals, particularly those with wealthy parents and few siblings.”

Inheritance tax planning

For those passing their wealth on to younger generations, it’s important to give some consideration to the way inheritance tax (IHT) will affect the beneficiaries of your estate.

An IHT charge of 40% will apply to any amount of your estate that exceeds the nil-rate band, which is currently £325,000 in 2018/19.

An additional band, called the residence nil-rate band (RNRB), applies on top of this when the family home is passed on to a direct descendant – this includes children and grandchildren.

The RNRB rose from £100,000 in 2016/17 to £125,000 for the 2018/19 tax year, and is set to hit £150,000 in 2019/20 before increasing again to £175,000 by 2020/21.

This is transferrable between spouses and civil partners, which means couples could obtain an IHT exemption of up to £900,000 in 2018/19 if they meet the criteria for the RNRB.

Though this threshold seems high, rising house values have made it more likely for an estate to exceed it.

To avoid facing high tax charges, IHT planning involves reducing your estate so it stays below the threshold.

Gifts

Gifts are exempt from IHT as long as you live for 7 years after making the gift. If you die within 7 years, IHT will be applied at a tapered rate.

Additionally, the following gifts can be made each tax year free of IHT:

  • gifts of up to £3,000
  • marriage and civil partnership gifts worth £5,000 (to a child), £2,500 (to a grandchild) and £1,000 (to non-relatives)
  • normal gifts out of income (such as Christmas and birthday presents), as long as your standard of living is not affected by the gift
  • small gifts up to £250 per person, as long as you haven’t used another exemption with the same person in the same tax year
  • financial assistance to family members or friends, to help with their living costs
  • gifts to charities and political parties.

Trusts

Another way to reduce the value of your estate is to pass ownership of your assets on in a trust.

This places the assets under the management of a trustee or group of trustees, who are responsible for distributing them according to your wishes.

There are 2 common types of trust, which are each treated differently for IHT purposes.

Bare trusts can hold assets for a beneficiary until they reach the age of 18, at which point they gain access to them.

Transfers to a bare trust are exempt from IHT as long as you live for 7 years after the transfer date.

Discretionary trusts give trustees more power to manage and distribute assets, as beneficiaries do not have an automatic entitlement to them.

Transfers to this type of trust are treated as chargeable lifetime transfers, and are taxed at a reduced rate of 20%.

 

Contact us to discuss IHT planning.

Leave a Reply

Your email address will not be published. Required fields are marked *