Leanne’s story shows why it is critical to think carefully about how you pass money to your heirs. It also illustrates why consulting a financial planner can help you avoid a large tax bill, assist children when they need it most, and understand what is affordable.
Knowing when and how to pass money to children or grandchildren can be confusing. Some people worry about gifting as they do not know whether they will need the money in future, especially with the high cost of long-term care. Others believe you can give as much as you want without any tax liability. But this is not the case.
Our client Leanne is 71, retired, in good health and has a good private pension income, with enough to cover her outgoings with a monthly surplus. She owns her home, valued at £750,000, outright. She has savings of £265,000, investments of £400,000, and personal effects of around £50,000. She does not expect any major changes to her financial situation.
Leanne recently inherited £600,000 from her late mother, so her total estate is worth £2,065,000. She also updated her will recently following her husband’s death and has a lasting power of attorney.
Family is important to Leanne and she especially wants to help her daughter Sarah, a key worker expecting her second child. Sarah lives in a rental property and Leanne would love to help her onto the property ladder. To be fair to her two other children Ben and Jennifer, she also wants to gift the same amounts to them, and contribute to savings plans for her seven grandchildren to use when they grow up.
But Leanne is unsure how much she can give and still be financially secure. Plus, she is worried about her health in old age. Having seen the care her mother received, Leanne wants to be sure that she could afford high-quality long-term care if she ever needed it.
Using cashflow analysis, we looked at several scenarios that factored in Leanne’s pension income, expenditure and potential later life expenses, including estimated care home fees, over different timeframes. This showed that she would be able to gift around £700,000 to her family and still maintain the lifestyle she wanted, even if she required a substantial period of long-term care.
She decided to gift £600,000, as this matched the inheritance she had received.
Although the gift to her children would have no immediate inheritance tax (IHT) liability, the seven-year rule means that, should Leanne die within seven years, the gift would be included in her estate. This means IHT would likely become payable. To avoid this possibility, we recommended that Leanne arrange for a deed of variation, which redirects her inheritance from her mother to her three children.
This means HMRC would treat the money as not having passed to Leanne and she would retain her full IHT allowance, which also includes her late husband’s allowance. The effect is that the remaining estate would most likely not be subject to IHT.
If she did not redirect the gift, one scenario is that Leanne might die with her estate having grown to around £2.1 million. In this case, IHT of £60,000 would be payable, based on current tax rules, which could change.
We also recommended that Leanne make regular contributions to junior individual savings accounts (Jisas) for each grandchild, from her surplus monthly income.
Leanne also wanted to ensure her children made best use of the gifted money and benefited from seeing her adviser. After preliminary discussions with us, they became clients, and we are helping them address other areas. These include:
The effect of our advice was that Leanne could help her children safe in the knowledge that she would have adequate finances, even if she needed high-quality, full-time care.
Using the deed of variation meant there was little prospect of having to pay any IHT on her estate. This should save a significant amount in tax for her children.
The contributions to her grandchildren’s JISAs are from her regular income and would also therefore not be subject to IHT. The JISAs would provide tax-free growth and be available to her grandchildren at age 18 to help fund university or a deposit on their first house.
Her children will also benefit from our advice, with individual financial plans tailored to their needs. These plans will guide the family towards achieving their goals and make best use of the money Leanne is passing down.
It is important to discuss and review all your financial affairs with an adviser regularly – from pensions to investments, wills, lasting powers of attorney and life policies in trust. To achieve your financial goals and security, you need a trustworthy, specialist adviser who truly listens and understands your needs.
Consulting a financial planner allowed Leanne to make the gifts to her children when they needed it most. It meant the world to her to be able to do this knowing that she would still be financially secure.
If you want to make gifts to your family and understand the impact on your financial situation, contact Blackstone Moregate on 020 3376 1444.
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