- Only a quarter have mitigated the amount of inheritance tax their children will pay
- This can be done through gifts during your lifetime or by establishing a trust.
- Sipps are also a tax-efficient way to invest money for your children’s future.
According to one study, three quarters of people think that their children will be worse off in the future than they are now.
But despite these fears among 74 percent of parents, only 14 percent of those surveyed said they regularly talked about money and inheritance with their children, according to a study by private bank Arbuthnot Latham.
And only a quarter, 26 percent, said they had taken steps to reduce the amount of inheritance tax their children will pay when they die.
Worrying future: most parents think their children will not be able to afford the same lifestyle as them
Rachel Wyatt, estate planner at Arbuthnot Latham, said: ‘Many people are uncomfortable talking in detail about inheritance and too often it is not talked about. The danger with this approach is that no one achieves the desired results.’
“Conversations about wealth transmission are crucial to achieving the desired outcome.”
He added: ‘We always encourage customers to have open and honest conversations with their children and grandchildren. This ensures that wishes are fulfilled and also allows future generations to plan their own financial future.’
It is increasingly likely that young people will not be able to match the quality of financial life that their parents enjoyed.
According to Arbuthnot Latham, their survey calls into question the “old perception that younger generations will always be better off than their parents because of long-standing trends of economic growth and improving living standards.”
In recent decades, house prices have outpaced wage growth, while the cost of living has continued to rise. Recent data shows that a third of first-time buyers rely on their parents to help them climb the property ladder.
As a result, fewer younger people are buying homes, and far fewer at similar ages their parents could, while more people are living at home with their parents.
In the 2021 census, up to 11.6 percent of people aged 30 to 34 lived at home, compared to 8.6 percent ten years earlier.
However, with young people increasingly reliant on their parents’ money, it is essential that those intending to leave an inheritance have a plan to ensure their children can make the most of it.
Wyatt said: ‘Without proper estate planning, your beneficiaries are left in the dark and this can lead to strained relationships due to uncertainty and their inability to plan efficiently. An estate plan gives you the tools to have the right conversation.
‘Whether making lifetime gifts or thinking about how your estate will pass to your beneficiaries on your death, there are steps you can take to mitigate IHT. The right solution will depend on your appetite for lifelong gift-giving and the control you want to retain over that gift.’
How can the inheritance tax be reduced?
Reducing the effects of inheritance tax can provide a big boost to the amount you can leave to your loved ones. There are several ways to do it.
If you want to help your children as soon as possible, you can use gifts. You are entitled to an annual gift allowance of £3,000, as well as £5,000 per child when you marry or form a civil partnership.
You can also make donations of up to £250 per person each tax year, as long as you have not used another allocation for them.
One thing to keep in mind, however, is that these awards are only tax-free if you live seven years after the gift was given. If you don’t, inheritance tax is paid on a sliding scale depending on the time between the gift and your death.
Alternatively, you can put money in a trust, which will reduce the amount of taxes your children will pay when they receive it. Appointing yourself as trustee and writing a letter of wishes will allow you to establish how you would like the money to be distributed.
Investing in a self-invested private pension or Sipp can also be a smart investment as they sit outside your estate and are not subject to inheritance tax.
Furthermore, if you die before age 75, your children will not pay income tax on the use of the pension fund.
Pensions are also one of the most efficient ways to save, as your funds will be subject to a 20 per cent tax relief.
“With a 40 per cent tax rate, HMRC may be the largest beneficiary of your estate, making IHT mitigation important for many when making such plans,” Wyatt said.
