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Leaving a legacy to loved ones: How to best support the next generation

5 min read
Yasmin Wales, Financial Planning Director10 Aug 2023

For numerous students across the country, the anticipation around A-level and university exam results is synonymous with excitement and uncertainty. And for many, these exam results might significantly shape their future (no pressure!). Will they move to a new town, start a new job, perhaps go travelling, or take a gap year to pursue a different dream?

These decisions will affect them and their families. For family members looking to support their children or grandchildren in this new stage, there can be apprehension around how they will settle in and, of course, how their plans will be funded.

For those looking to help their family members financially in this new stage, the first question to ask is how to do so in the best possible way. Is an outright cash gift a good idea, or would it be best to have some element of control over the funds?

There is no one-size-fits-all answer, but the best planning involves structuring your finances in the most tax-efficient way. At 7IM, we can help you understand what makes most sense from a tax point of view, or when it is best to make gift contributions. This way, you can always be confident you are making the most of your gift contributions and passing on wealth to the next generation in the most optimal manner.

Relinquishing control? Sometimes it’s easier said than done

Trusts are one available option for those who would prefer to retain some control. Trusts allow access as needed, but they remove responsibility from your children or grandchildren to look after a large sum of money themselves. However, trusts can often come with associated costs, taxes, and complications. It is therefore worth speaking to a professional to discuss what options are most suitable.

Various types of investments can offer attractive benefits and allowances for younger individuals, along with the opportunity for long-term investment growth. For example, even if your children do not have any earnings, you can put up to £3,600 gross into a personal pension for them. The lack of access until age 57* means that the money is secured and has a long investment time horizon.

*From 6 April 2028, the National Minimum Pension Age will increase to 57.

It is worth noting that controlling what happens to your money after your death is tricky, therefore some people prefer to put a plan in place whilst they are alive to oversee what the funds are used for. The timing of any gifts will be dependent on the individual family, but in some cases, it can be satisfying for family members to see the benefit of their gift whilst they are alive rather than leaving funds on death.

Investing in bricks and mortar

It is becoming more of a challenge for the next generation to get on the housing ladder, so a gift to help with a deposit is a popular choice. Gifting cash for a deposit can often remove the complexities of the parent or grandparent purchasing a second property, or even reduce the mortgage liability that your child or grandchild would have.

Keeping the taxman happy

Passing on wealth to the next generation will often deserve some Inheritance Tax considerations, and therefore it is important to discuss this with a professional adviser ahead of making any gifts.

Certain gifts can fall within your annual exemptions, although these are often minimal. You can also make regular payments to your children or grandchildren, for example, to help with their living costs. These could be made free of tax under certain circumstances, depending on your income and spending.

You may have heard of the term "the seven-year rule" when it comes to gifting. Typically, if you die within seven years of giving a gift and there’s Inheritance Tax to pay on it, the amount of tax due after your death depends on when you paid it. This can be a further reason to consider gifting to the next generation whilst you are younger and in good health.

Simply start the conversation

Many of our clients choose to involve their children and grandchildren in discussions, and it is often the first time they partake in conversations about their finances and future options. This is a good opportunity to hear and better understand their own opinions. Speaking with a professional adviser in an informal setting, and perhaps starting small to get them used to the concepts of money, can be a valuable tool for later life.

Wondering how much you can afford to give? We can help

Lastly, for those who are unsure of the amount they can afford to give, 7IM can help with cash flow modelling, which assesses your existing asset position and compares this with your projected income and spending throughout your lifetime. We can add in various assumptions on inflation, market returns, life expectancy, and future care costs to determine how much you can realistically gift without impacting your standard of living.

If you’re thinking about having these conversations with the next generation, or are already having them and need some help, get in touch with us today to find out how 7IM could help.

The information and/or any reference to specific instruments contained in this document does not constitute an investment recommendation or tax advice. Capital at risk. The value of your investments and the income from them may go down as well as up, and you could get back less than you invested. Tax rules are subject to change and taxation will vary depending on individual circumstances.
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