In a media interview recently, James Bond star Daniel Craig revealed that he will not be leaving his fortune to his children as he regards inheritances as “quite distasteful”. Instead, the celebrated actor plans to spend his wealth or give it away.
Daniel Craig is of course not the first wealthy individual to take such a view. Billionaires such as Bill Gates and Warren Buffett have both stated they will only leave a relatively small portion of their vast net worth to their children when they die, giving most of their wealth away to good causes. These are ultimately personal choices.
These days you don’t have to be super-wealthy to either leave assets behind when you die, or for your estate to fall into the scope of Inheritance Tax on death given the freezing of the Inheritance Tax exemption for over a decade at £325,000 per person (and it will remain frozen until at least April 2026 following the last Budget).
Yet inheritances are set to become increasingly common. With the post-war baby boomer generation, who hold over half of private wealth in the UK, now in late age, we are on the cusp of a period of soaring inheritances as wealth accumulated through rising property and investment prices is left behind and passed on. According to the Resolution Foundation, inheritances are set to more than double over the next decade and peak around 2035, with key beneficiaries being today’s millennials – a generation who have struggled with graduate debt and getting their feet on the property ladder.
Whether you want to pass wealth on to your children or grandchildren, or disagree with the concept of inherited wealth entirely, what matters is having a conscious plan for what will happen to your assets when you die. Doing nothing merely increases the likelihood of your assets passing to HM Treasury on death through Inheritance Tax rather than being directed to causes you care about or your family and friends.
There is an old saying that “nothing is certain except death and taxes”, but it is human nature not to dwell on the inevitable until very late in life. Yet it is important to plan well ahead if you want to exercise control over what will happen to any remaining personal wealth when you die. Writing a Will is absolutely vital, especially if you have dependants, but leaving decisions on how your wealth should be carved up solely to your Will could mean it is too late to mitigate the impact of Inheritance Tax and this could land your dependants with an unwelcome tax bill.
Tilney’s financial planners see people typically falling into three camps:
It is far better to plan ahead than do nothing. If you are going to enjoy spending as much of your wealth as possible while alive, then it is important to be able to do this with the confidence that you are not going to run out before you die. This requires careful planning and is where a good financial planner can help, with the starting point being to build a cashflow model to make sure your rate of spending isn’t going to drain your resources too quickly. Running out of assets halfway through retirement is not a comfortable place to end.
For those who want to support their family or chosen causes, a plan is also critical. Inheritance tax is ultimately a voluntary tax, as it can be mitigated entirely by giving your money away while alive, whether to charitable or philanthropic causes or family and friends. There are a number of allowances for making financial gifts, but any gift is potentially exempt from Inheritance Tax if you live for at least seven years after making it.
There are a huge array of options to reduce a potential Inheritance Tax liability including passing on pensions* or transferring investments into assets such as AIM shares** or EIS that might qualify for Business Relief after two years and thereby be carved out of an estate for Inheritance Tax purposes. The key is to plan well ahead!
Our experienced financial planners can help you plan for the future, forecast your future finances using cashflow modelling and help you structure your finances to mitigate Inheritance Tax. Book a free consultation or call us on 020 7189 2400.
Advice in relation to trusts and inheritance tax planning is not regulated by the Financial Conduct Authority, however, the products used in relation to trusts and to mitigate tax may be regulated.
* Modern pensions can be a highly tax efficient route for passing wealth on to future generations, as they aren’t included when your estate is calculated for the purposes of inheritance tax. If you can afford to leave your pension untouched while using other assets to fund your retirement, you could pass your pension on tax-efficiently while gradually reducing the size of your taxable estate. If you die before you are 75, the person who inherits your pension can make withdrawals without paying any tax. If you die after age 75, the beneficiary will pay tax on withdrawals from the inherited pension at their marginal income tax rate. However, access to these pension features are not available on many older pensions and therefore it is worth checking whether your plans will qualify.
**The market in AIM shares can be illiquid as small volumes of business can have a disproportionate effect on price and lead to greater volatility. As a result, AIM investments tend to be more volatile than those with a full listing and must be considered a high-risk investment. EIS companies are early-stage businesses, so investments into these companies should also be considered high risk. Investments could fall in value and investors may not get back their investment.