Gifts of the financial variety

The best gift you can ever make to your grandchild or grandchildren this festive period will have a longer-lasting impact

Your grandchild or grandchildren may want the latest toy or gadget this Christmas, but how about giving them a present that can help their financial future? UK tax laws allow children to receive pension contributions of up to £3,600 a year from the moment they are born.

HM Revenue & Customs will currently give tax relief of £60 per month on a £240 a month contribution. The money is locked away until the recipient reaches age 55, but it means they can’t ‘fritter away’ their inheritance!

More self-reliant
Instead, the money becomes available at a time when they may really need it – to pay off a mortgage or fund their lifestyle in retirement. After all, children born today are unlikely to enjoy the same level of retirement funding that the current baby boomers are enjoying. They’ll need to be more self-reliant, as dependence on the State is likely to diminish and company benefits such as final salary pension schemes disappear.

There’s another reason why it may make sense for you to do this, and that’s tax-efficiency. If you’ve taken your tax-free lump sum from your own pension, the remaining fund will either be in ‘income drawdown’ or you will have purchased an annuity. What you may not realise is that even if you are not actually taking an income from your remaining pension fund, it’s still classed as ‘in drawdown’. This means it could be subject to a 55 per cent tax charge when you die, so your beneficiaries could receive just 45 per cent of your remaining pension fund [1].

Inheritance tax purposes
Using income from your drawdown fund could help move the money out of this 55 per cent death tax environment. Similarly, if you’ve taken out an annuity and have surplus income, then putting the money into your grandchild’s pension may also help move money out of your estate for inheritance tax purposes.

Once the contribution is made into the grandchild’s pension, the future investment growth of those contributions belongs to your grandchild, creating significant longer-term value compared to leaving the money within your estate.

[1] Drawdown money is subject to a 
55 per cent death tax if paid as a lump sum to beneficiaries.

While annuities are generally guaranteed to be paid, remaining invested and using drawdown means that the value of your pension, and the income from it, can go down as well as up. Therefore there is a chance that you may not get back as much as you would by using an annuity. Drawdown is a high-risk option which is not suitable for everyone. If the market moves against you, capital and income will fall. High withdrawals will also deplete the fund, leaving you short on income later in retirement. The value of investments and the income from them can go down as well as up. You may not get back as much as you invested.

Inheritance tax ‘Nil Rate Band’ and rates

We can help you evaluate the size of your estate—which could include assets such as property, pensions, shares and personal property—and identify the opportunities that will help you avoid or reduce the amount of Inheritance Tax your family will have to pay on your estate and enable you to preserve wealth for your dependants if the worst comes to the worst.

We can advise on making appropriate provisions for vulnerable beneficiaries, protecting their resources whilst continuing to benefit from them. You may also want to consider appointing a Lasting Power of Attorney who can manage your affairs in the event you become unable to do so.

Our aim is to maximise the inheritance your beneficiaries will receive, avoiding or minimising the amount of Inheritance Tax your family will have to pay on your estate, ensuring plans are in place to protect your property so that you are not forced to sell your home to pay for your care home costs should the need arise.

We are on hand to provide straightforward, up-to-date advice. We will assess your situation and provide advice on a number of tax migration solutions, creating bespoke estate protection planning strategies that are tailored to suit you and your circumstances.

Make writing your will your top 2014 New Year resolution

As much as we might not want to think about it, we are all going to die one day. Most of us know that we should write a will, but most of us never get round to it. Do you fall into this category? If the answer is ‘yes’, as the New Year approaches make writing your will your top 2014 resolution.

Writing a will gives you peace of mind that your wishes will be respected after you die and, by making those wishes clear, you can save your loved ones any additional stress at what is likely to be a very difficult time. Not writing your will could have serious consequences for those you leave behind. If you die without getting your financial affairs in order, your money, personal belongings and even your home could go to the person you least want to have them, and your loved ones could lose out.

Get your financial 
affairs in order

  • Specify exactly how you want to divide up your assets, including any property, savings, business interests, personal effects and even pets – known in legal terms as your ‘estate’
  • Appoint a guardian to care for your children as well as making specific financial provisions to help them do so (otherwise, it will be up to the courts to decide who looks after any children under 18 who are left without a parent)
  • Use your will to save tax and potentially reduce or eliminate the amount of inheritance tax that may need to be paid on your estate
Protect your assets for future generations and give yourself peace of mind that your affairs are in order

How will your estate 
be shared out?
In England or Wales (some areas of the law and legal procedures are different in Scotland), if you die without a valid will, laws known as the Rules of Intestacy will determine how your estate is shared out. Importantly, only spouses or registered civil partners and certain blood relatives can inherit under these rules – unmarried partners who are not in a civil partnership cannot benefit, nor can relations by marriage or close friends, even if there are no qualifying blood relatives (in which case your estate will pass to the Crown).

A difficult financial position
Not having a will can mean lengthy delays in distributing your assets, in some cases years, which could leave your nearest and dearest in a difficult financial position, depending on your situation.

Family lives are often now more complicated, with more couples divorcing and second marriages and second families on the rise. In such cases, it is even more important to have a suitable will in place.

It is also essential you remember to review your will, especially when life changes occur. 
Life events such as a second marriage will revoke any previous wills, and a divorce will cancel any benefit to a former spouse, unless the will specifically states that divorce should 
not affect the entitlement.

Reduce a potential tax burden
Currently, if you leave behind an estate worth more than £325,000 (2013/14 tax year), inheritance tax (IHT) is levied at 40 per cent on anything above this threshold. If this is likely to apply to you, writing a will could help you reduce the potential tax burden on your beneficiaries.

It makes sense for a married couple to write their wills in conjunction with each other as, usually, the IHT is only an issue on the second death. Careful planning on the first death can, however, sometimes reduce the total eventual tax liability

This is because bequests between spouses are exempt from IHT and so it is easily possible to avoid any tax liability at that stage. The issue is delayed rather than avoided altogether, so the will of the first to die should be written with that in mind.

Also exempt are gifts to charities. Any money you leave to charity is not taxed, and if you leave more than 10 per cent of your estate to charity, any IHT payable on the remainder will be charged at a reduced rate of 36 per cent.

The Financial Conduct Authority does not regulate Taxation & Trust advice or Will Writing.