Wealth Transfer – The Basics

Six years have passed since the collapse of Northern Rock and five years from the failure of Lehman Brothers. The near meltdown on the financial system lead to the worst recession for 100 years (in terms of peak to trough GDP). It would be fair to say that it has been a difficult period for investors, businesses and governments around the world.

That said, we have witnessed resilience in many businesses and the last six months have brought encouraging news from both production, unemployment and financial markets.

As the economy starts to pick up, for some the question will shift from conservative de-risking strategies to the best way to optimise the transfer of wealth – making sure their estates are not hit too hard by Inheritance Tax (IHT) and making sure that their assets are passed on to future generations.

If you’re in that happy position, what steps should you take to make sure your wealth is transferred to the people you want to transfer it to? Like so many areas of financial planning, this is an area where some basic preparatory work can go a long way. We’ve outlined some simple steps below that everyone should take.

Make a Will.

Making a Will is relatively straightforward and inexpensive, and there’s really no excuse for not doing it. You may think you don’t need to do anything as you want all your assets to pass to your spouse but that won’t necessarily be the case. If you die intestate (that is, without making a will) then other family members may well benefit from your estate whether you want them to or not. So make a Will – and make sure you keep it up to date.

Start to give money away.

Many people still don’t know that they can make gifts out of regular income. This can be an excellent method of passing wealth on to the next generation and providing the gifts pass three key tests they will not incur an IHT liability. The gifts must be made out of income (as opposed to selling assets to fund them); they must be made on a regular basis and they must not reduce the donor’s standard of living.

Make your gifts sooner rather than later.

Any gift given more than seven years before the death of the donor is free of IHT – a good example of the need to plan early. Remember though, that the ‘gift with reservation’ rules apply: if you are giving something away you cannot continue to enjoy the benefit of it. For example, you cannot give your house to your children and continue living in it rent free.

But some gifts are more equal than others. Certain gifts are treated differently, and in this case, the ‘seven-year rule’ doesn’t apply. Both parents can give up to £5,000 to their children when they marry, and annual gifts of up to £3,000 can also be given. If you cannot give large sums of money then it makes sense to make use of these smaller gift allowances.

Make use of Trusts.

Many people believe that trusts are highly complicated and are only to be used for multi-million-pound estates. Far from it. They can be simple and relatively inexpensive, yet still allow you to transfer wealth out of your estate and save IHT into the bargain. Yes, you’ll need specialist advice but the potential savings in tax will almost certainly cover the cost of that advice many times over.

Flee the Country.

We are perhaps moving into more extreme areas with this last suggestion, but if you are permanently resident abroad and intend to remain so then it may be that your country of domicile has changed. This could well impact favourably on the IHT calculation regarding your estate. As with trusts, this is an area where specialist advice is very much required but once again the savings can be significant.

As we stated above, transferring wealth to your intended beneficiaries requires careful planning, but if that financial planning is done properly then the savings made in Inheritance Tax can be substantial.

With the right advice, there’s no reason why you can’t transfer the wealth you want to transfer – while continuing to enjoy the life you deserve. First Wealth can help you with the successful transfer of wealth. Specialist help is needed in many areas and we are always happy to advise clients in what can be a very complicated area. Often the best solution is a combination of the various options available to you.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.