How to pass on wealth tax efficiently

As the rather unpleasant adage goes, it’s better to give with a warm hand than a cold one. Traditionally people wait to pass wealth from one generation to another when they die. However, while it’s vital not to leave yourself short of cash as you get older, it’s worth considering whether you can give anything away during your lifetime too.

Everything from the fact we’re living longer, to the huge increases in the price of property means there are plenty of ways that passing money on can help support your family.

The older we get, the more wealth we tend to have. In the two years to March 2020, in households where the head is aged 55-65, wealth is 25 times higher than where they’re aged 16 to 24.

We also tend to have much higher ISA balances. The average ISA value in April 2020 was £3,910 for those under the age of 25, £6,366 for those aged 25-34, and £46,090 for those aged 65 and over.

Passing some of this on down the generations can make an enormous difference, and there are a number of ways in which ISAs can help you do this tax efficiently.

This article isn’t personal advice. Tax rules can change, and any benefits depend on your circumstances. If you’re not sure what’s right for you, seek advice. Investments can fall as well as rise in value so you could get back less than you invest.

Supporting younger generations through further education

The average student debt for the freshers of 2021 will be over £45,000. It’s not just about tuition fees. The average cost of accommodation is now almost £8,000 a year in London, and one in five students at Russel Group universities have considered dropping out because of the cost of living.

One option is to help them build a nest egg for their early adult life, to help with these costs. Each child under 18 has a Junior ISA (JISA) allowance which is currently £9,000 a year, and once set up by parents, then grandparents, or any other friends or relatives can add money to them too.

Explore the JISA

Even if they don’t choose to go into further education, they then have the money they need to support them on whatever path they choose.

Learn more about investing for children

Helping them onto the property ladder

In 2022, someone on an average full-time income in England would need to spend 8.3 times their annual earnings to buy the average home. Meanwhile, in the past year, half of tenants in England have seen their rents hiked – they’re up by an average of 10%.

It’s no wonder that the number of people trapped in the rental cycle later in life is growing. Within every age group, the proportion of British households in the private rental sector is up over the past decade – with the proportion of those aged 35-44 who are renting rising from 19% to 26%.

One cost-effective way to pass money onto a young adult is through a Lifetime ISA (LISA) – if they’re aged 18-39, are saving for their first property, and have at least a year until they want to buy.

Once set up by the young adult, you can pay into their LISA. The limit is £4,000 a year, and the government will top it up by 25% – taking the maximum to £5,000 for each tax year.

After 12 months from the first payment, they can use the money to make an eligible house purchase for a property worth up to £450,000. Or they can wait until they're 60 and take their money out then.

If they want to take money out before they're 60 and they aren't buying their first home, there's usually a 25% government charge. That means they could get back less than originally put in.

Educating grandchildren about investing

Not only will a JISA provide a nest egg to help them start adult life, it’s also a brilliant way to introduce younger people to investments. It’s far easier to encourage them to engage with the idea of investing when they already have a stake.

Growing up without any contact with the investment world can make it seem like an alien planet, so millions of people don’t engage with it at all.

By giving your children a stake, and talking to them about it, they never have to think ‘am I the kind of person who invests?’ because they already do.

Learn more about investing

Paying less inheritance tax

For older people, giving money away can help you to reduce your inheritance tax liability, if you’re likely to have one. This includes making gifts within your annual allowances, which leave your estate on day one. It also includes making larger gifts, which as long as you live for a further seven years, will be out of your estate for inheritance tax purposes.

How to reduce your inheritance tax bill

You can also make regular gifts from income, and as long as it doesn’t force you to eat into capital, it can count as leaving your estate immediately.

Gifting to save inheritance tax – level up your plans

Directing these gifts into a JISA is a sensible option if they’re under 18. It has the added benefit that it leaves your account immediately, but the child won’t have access to the money until the age of 18. This gives them time to build their understanding of the value of money.

If you want to support the retirement income of the youngest members of the family, a Junior Self-Invested Personal Pension (JSIPP) is also worth considering.

You can contribute up to £2,880 a year into a child’s pension, and they’ll get tax relief from the government topping them up to £3,600. Of course, they won’t be able to access the money until at least the age of 57 (which is likely to rise further). But if you’re happy with this, it can be an incredibly rewarding option.

Find out more about the JSIPP

For older offspring, you could always consider paying into their Lifetime ISA or Stocks and Shares ISA.

Explore the Stocks and Shares ISA

Helping your own elderly parents

Intergenerational planning can work in more than one way. The ‘sandwich generation’ could end up looking after their parents at the same time as supporting their own children, so you could find yourself facing a financial squeeze during these key caring years. That means it will be vital to have capital you can fall back on during this period.

Building sums in your ISAs will mean you can step in if the state offers no help with care, or if they’re on a waiting list that could see them living in pain for years.

ISAs are incredibly useful, but they’re not the only option.

There are options to suit everyone. So if you were planning to leave money to your family after you’ve gone, it’s worth considering whether any of this can be passed on during your lifetime. Not only could it be incredibly valuable for your loved ones, but it also means you’ll be around to see them enjoy the benefit.