Recent research suggests that while the vast majority of over-60s plan to pass wealth onto their children, many have no plan in place to help them do so.

One issue could be the difficulties associated with talking about money and estate planning. And yet, these discussions – either with your children or your parents – are a crucial part of the process.

Expert Wealth can help you pass on your wealth in the most tax-efficient way, managing the Inheritance Tax (IHT) liability you leave behind.

1. Giving while living

Bill and Melinda Gates and Warren Buffett formed the Giving Pledge in 2010, encouraging the world’s super-rich to give away their wealth during their lifetimes.

But you don’t need to be a billionaire to practice giving while living. There are several HMRC gifting rules that you can make use of, both to lower the value of your estate for IHT purposes, and to experience the positive impact of your money on those you gift it to.

Small gifts allowance

You can gift up to £250 to the same individual, in a given tax year, tax-free. This could be used to cover one-off gifts such as Christmas or birthday presents.

Wedding gifts

Weddings provide an excellent opportunity to gift money to loved ones. Parents can gift up to £5,000 to their child as a wedding or civil partnership gift. The limit for grandparents stands at £2,500 while you can gift £1,000 to family friends or other acquaintances.

Make a gift using your annual exemption

The annual exemption is currently £3,000 and allows you to gift that amount during a tax year, thereby removing it from the value of your estate for IHT purposes.

The limit applies per individual and can be carried forward up to a maximum of £6,000. That means you and your partner could gift £12,000 if neither of you used your allowance in the previous tax year.

Make a gift from income

You can make regular gifts using the regular gifts from income exemption. You’ll need to prove that the gift is made from your normal income, is part of your usual expenditure, and that making the gift doesn’t affect your standard of living.

You could use this exemption to make regular contributions to a child’s pension or Junior ISA, for example.

2. Put a will in place and consider a charitable legacy

Having an up-to-date will in place is the best way to ensure your wishes are known and adhered to. It can also reduce the costs and additional stress for loved ones when compared to death without a will in place, known as dying “intestate”.

You can use a will to stipulate how your estate is distributed – from money to individual items and who should look after any inheritance you plan to give to a child under the age of 18.

You might also consider leaving some of your wealth to a cause you care about. This has the effect of helping a worthy charity, while also having potential tax benefits.

While the usual rate of IHT is 40%, paid on the value of your estate above the current threshold of £325,000, this rate can be lowered through charitable giving.

Donate more than 10% of your net estate to charity, and the rate of IHT payable on your estate reduces to 36%.

Charitable legacies soared at the onset of the pandemic. The Independent reported in May last year that April 2020 saw over £35 million worth of charity donations written into wills. This compared to an average of £4 million per month during 2019.

3. Consider using your pension

You can currently pass unused pensions onto the next generation tax-free in some cases.

If your retirement plans include income from non-pension sources – from ISA investments or buy-to-let properties, for example – you might be able to leave your pension until last or earmark a certain pension plan you hold for passing on.

Keeping a plan invested will allow you to continue taking advantage of compound growth, and any additional gains from investment performance (although of course your fund can go down as well as up).

How you pass on your pension at death will depend on when death occurs. If you die before age 75, your unused pension pot remains outside of your estate for IHT calculation purposes. The whole of your unused fund can pass to a chosen beneficiary tax-free.

On death after age 75, you can still pass unused pension funds to the beneficiary of your choice, but they will pay tax on the amount they receive at their marginal rate.

It is worth noting that beneficiaries are chosen via your pension provider, not your will. You will need to contact your pension providers directly to see if you have a beneficiary in place. If you don’t – or wish to make an amendment – you will need to complete an Expression of Wish form.

Get in touch: Please get in touch if you’d like to discuss any aspect of your estate planning, including managing a potential IHT liability.

Please note: The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.