Business column: Creating A Financial Legacy For Your Family

Tim Reedman
Tim Reedman
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Raising a child is a costly business - nappies, clothes, pocket money and school trips are just the tip of the iceberg.

The results of a survey indicated that by the time your child has reached 21 you would have spent an average of £218,000 on their upbringing (Source: www.mailonline.co.uk, January 2012). It doesn’t get any easier once they reach adulthood age. The chances are high that they will need financial help to fund a gap year, or to get a foot on the property ladder.

But looking after your children doesn’t end when they start carving out a career and have a family of their own. In all likelihood you will want to create a financial legacy to ensure that the wealth you have created is preserved, protected and passed on to them.

Preserving as much of your wealth as possible requires careful estate planning; otherwise you may not pass on as much wealth as you anticipate.

Inheritance tax (IHT), which is just one barrier to the transfer of wealth, is a 40 per cent tax imposed on the worldwide estate of anyone who is UK-domiciled on all assets above the nil rate band of £325,000. The nil rate band can be passed to a surviving spouse, if not used, increasing the survivor’s nil rate band to up to £650,000. The threshold is normally updated each year in the Budget, in line with inflation, but the Coalition has said that it will now be frozen until April 2015.

One of the simplest IHT mitigation tools is a Will. Not only can a well drafted Will mitigate IHT, it is also crucial for anyone wanting to protect their family from a huge headache after they die.

Only with an appropriately drafted Will can you be certain that your estate will go to the right people. If you do not have a valid Will, you risk depriving your family of their home, increasing the inheritance tax (IHT) burden and leaving parts of your estate in the wrong hands.

In addition to Wills, Trusts can also help you to protect and preserve your estate as they allow you give away assets but restrict or direct how and when they are used.

There are many different types of Trusts, some straightforward and others very complicated. A common use of a Trust is to hold assets on behalf of a child until they are old enough to look after their own money. However, it is vital that you seek expert help before you take the plunge because there may be income tax or capital gains tax as well as Inheritance Tax implications that need to be considered.

To ensure that the assets are invested in accordance with the terms of the Trust you should ensure that you appoint trustees who have the necessary skills and knowledge. It can often make sense to use professional trustees rather than lay trustees. Family members often find it difficult to act objectively. Money and family arguments are often driven by emotion rather than what is correct and appropriate. The appointment of a neutral, well-practiced professional trustee would avoid such conflicts. Professional trustees will also have the expertise, specialist knowledge and experience to identify potential problems, provide solutions and promote good governance.

Another method for helping to reduce any potential IHT burden is gifting away money before you die. This can be done through potentially exempt transfers (PETs) which revolve around the famous “seven year rule”. Put simply, if you wish to pass assets to family and friends during your lifetime, these gifts will only be made free of IHT providing you survive seven years from the date of making the gift.

If you die within this seven-year period, potentially the value of the gifted assets will be added back into your estate albeit only the value calculated by the date of the gift and not any subsequent growth or increase in value.

There are some lifetime gifts that are exempt from any IHT. You can gift up to £3,000 a year, which can be divided between as many people as you like. You are also allowed to use the previous year’s allowance if it has not been used. Parents are each allowed to give away £5,000 to their children when they get married, while grandparents can give £2,500.

Meanwhile, if you are saving on behalf of your child or children it makes sense to ensure that the method used is as tax-efficient as possible – and to start as early as possible.

A Junior ISA offers parents, grandparents, other relatives and friends the opportunity to invest regular contributions or lump sums on behalf of a child in a flexible and tax-efficient way. Replacing the Child Trust Fund, the Junior ISA provides the same tax advantages as a standard ISA; tax-efficient interest on cash deposits, no further liability to income tax on dividends and no capital gains tax. Of course, the favourable tax treatment for Junior ISAs may not be maintained in the future and is subject to changes in legislation.

One existing solution is a Bare Trust, which can be used to shelter investments in funds or single shares, or even property, on behalf of children, grandchildren, godchildren, nieces or nephews, and which can be accessed at 18 years of age. The Trust can be used to offset any gains against the child’s annual capital gains tax allowance and any income against their income tax allowance. If you are the parent, however, you are liable for tax on any income above £100 a year from the investments.

Setting up a pension for a child (you are allowed to invest a maximum of £3,600 gross a year on their behalf) is one of the most efficient financial gifts you can make. You get tax relief on the contribution and the child benefits from tax-free growth. Because the money is invested over such a long term – up to 55 years or more – you have the luxury of taking a unique long view on the investment strategy, which presents the opportunity to really go for maximum returns.

On top of all this, if your child is financially dependent on you, you need to make sure you have adequate provisions in place to replace your income in the event of death, illness or disability.

Being a parent brings with it rich rewards, from watching your children walk their first steps, to applauding them when they walk on stage to collect their graduation scroll. But such rich rewards do not have to be only emotional; they can be real too, with a little foresight and some expert financial help.

To receive a complimentary guide covering Wealth Management, Retirement Planning or Inheritance Tax Planning, produced by St. James’s Place Wealth Management, contact Tim Reedman, of St. James’s Place on 01243 788567, or 07738 832115, by email Tim.reedman@sjpp.co.uk or click here.