Moving wealth from one generation to the next?

The budget announcement on 30th October means that, from 6th April 2027, defined contribution pensions are proposed to be included in inheritance tax (IHT) estates. This marks a significant change, one that many may have underestimated when Rachel Reeves announced it.

Pensions, often our second largest asset after our homes, are now poised to contribute substantially to individual inheritance tax liabilities in the coming years. So, what can you do about it?

Option 1: Do Nothing

The first option is to do nothing and pay the tax owed to HMRC. This might be the only choice if something unexpected happens and there isn’t enough time to plan effectively for passing money tax-efficiently from one generation to the next.

Option 2: Give It Away

The second option involves gradually giving money away to family and relatives. This is a common approach, often used to help loved ones buy their first property. However, under the 7-year rule, any money gifted is still considered part of the individual’s IHT estate for seven years after the gift is made. After this period, the money is excluded from your estate from the government’s perspective. The downside is that this could create financial strain if the giver needs the money during retirement to maintain their standard of living.

Option 3: Give It Away, but Maintain Control

The third option is to give money away while retaining control. Many grandparents, for example, want to help the next generation by creating a trust. Trusts are a great way to provide financial support—such as funding education, buying a first car, or purchasing a first property—while still maintaining control over how the money is used. This approach can also be tax-efficient, as the money in the trust can be invested while awaiting allocation according to the terms set out in the trust deed.

Option 4: Insure Against the Liability

The fourth option is to insure against the liability. This strategy is likely to become increasingly popular as inheritance tax affects more people. There are two main approaches:

1. Insuring the Full Estimated Liability: This involves taking out a life insurance policy to cover the estimated inheritance tax liability, with the payout covering the owed tax.

2. Insuring Against the 7-Year Rule: This involves insurance specifically designed to address the IHT liability during the 7-year gifting period when passing money between individuals.

If this sounds like something you or someone you know should be concerned about, taking the first step by arranging a no-obligation meeting with me is an excellent way to get started.

Contact us for a no obligation meeting. Please get in touch via [email protected] or +44 7527275684.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

Twelve Wealth Management Limited is an Appointed Representative of and represents only St. James's Place Wealth Management plc (which is authorised and regulated by the Financial Conduct Authority).

SJP Approved 16/12/2024