Spending the kids’ inheritance as effectively as possible, to maximise their inheritance without depriving yourself can be a challenge. Of course, there are the usual gifting and tax-efficient investment options, detailed elsewhere. But in terms of what you should use to cover your expenses, it makes sense to spend the least tax-efficient money first, leaving more for the kids. Here are some thoughts (read through to discover the point!) Most of them would be taxed at 40% (or more if tax rates rise as seems likely) if you are subject to IHT.
- Current accounts should be used for immediate needs. I can’t think of any tax advantages they have, though joint accounts or holdings of most types will normally automatically pass to the survivor to us, without a requirement for probate, and that does not (necessarily) apply to assets in single names.
- Deposit accounts are less tax-efficient than ISAs.
- Investment bonds are less tax-efficient than ISAs (but be careful that they have not been set up for other purposes than very straightforward tax efficiency.)
- Shares in an ISA are more tax-efficient than those outside.
- Specialist investments qualifying for business property relief on Inheritance Tax can be very IHT efficient but they tend to be high risk, and occasionally, they don’t work.
- Pension schemes are pretty tax efficient with tax relief on the way in, relatively tax-free growth and the ability to take a tax-free lump sum. If you die before the age of 75, you can often pass the pension fund down tax-free. Who have you named as the beneficiary of your pension? Ex-wife or husband? Current wife or husband, who may be well off already? Maybe that could be rethought? If you die after 75, the inheritors will pay tax at their marginal rate (and a big fund could tip the poorest into higher rate tax, currently at the same rate as Inheritance Tax.
- An old Will or Trust may create an unnecessary additional IHT bill of up to £140,000.
So maybe you should consider using your resources starting at the top and working down, and try to avoid drawing down your pension lump sum, attractive though that may be, until you reach 75. But even then it may not be the most tax-efficient thing to do!
These are just some thoughts, triggered by an interesting article on Yahoo! You should certainly chat them through with your independent financial adviser before taking any action, which will vary depending on your own preferences and the quality of your existing investments.
If you would like an overview of your Inheritance Tax Planning, rather than specifically the financial services aspects, why not take advantage of our contacts expertise for a relatively tiny investment? Whilst the review is not specifically focussed on tax-efficient Wills, or Trusts, that is what the majority of readers may well need to consider.
IHT Review. Spends as little of the kids’ inheritance as is reasonable!