Article by Tanita Jamil, Technical Consultant, St James’s Place
Women in the so-called ‘sandwich generation’ – caring for elderly parents while still raising their children – often face a dilemma when it comes to moving wealth between generations.
If that’s you, whether you’re leaving or receiving an inheritance, there are ways to make sure your family gets the best out of any assets left behind.
When it comes to passing money through generations of the family, it’s long been the case that when older generations die, their children receive whatever is left behind. But, with older generations increasingly expected to live into their 80s and even 90s, recent years have produced a shift – and one that poses a real challenge for women in the sandwich generation.
More than six in 10 of those balancing caring for both children and elderly relatives, are women, according to the Office for National Statistics (ONS).
In years gone by, people have tended to receive inheritances while they were still raising their own families and buying homes. Now, the financial boost arrives later in life, with the average age of inheritance lying between 55 and 64, ONS figures show.
So, what does this mean if you’re in your 50s (or younger!) and expecting an inheritance?
Where should inheritance go?
There’s a chance you’ll be receiving an inheritance just as you approach your own retirement. So, do you look at it as a way of boosting your pension pot? Or will younger members of your family benefit more?
Research published in 2019 by OneFamily found that some £19 billion had been left directly with the youngest generations in the previous five years, while another £23bn had been passed to the younger family members by the original beneficiaries (i.e. their parents).
More than half of beneficiaries aged over 55 who received family wealth after turning 50 chose to pass it on to their children and grandchildren, according to the report. And that’s not just benevolence: by passing money down a further generation, those in the middle can focus on their own finances without having to support their children as much.
Maximising the benefits
Inheritance tax (IHT) only affects a small minority of families, but the impact can be considerable. With 40% charged on the amount of any of the estate passed on above the nil rate band – currently £325,000 (rising to £500,000 when the ‘main residence nil rate band’, currently £175,000, is added) – IHT can take a big bite out of any wealth being handed down. If there’s any IHT to pay, it comes out of the estate of the person who has died – so the beneficiaries only get what’s left once IHT has been paid.
There are several ways to mitigate IHT or avoid it altogether, particularly if you’re helping your parents pass on their wealth effectively:
- Gifting – The annual gift exemption allows you to carry forward £3,000 from the previous tax year, doubling up the gift exemption to £6,000. Couples can each use this exemption. Similarly, small gifts up to £250 in a tax year to any number of people are completely free of IHT, while gifts when your children and grandchildren get married may also be exempt.
- Creating trusts – By placing assets into a trust, you can keep them out of your estate for IHT purposes. There are several different types of trust, with different tax rules, so advice is recommended.
- Donating – You can also reduce the IHT charge on your remaining assets from 40% to 36% if you leave at least 10% of your total estate to a registered charity.
Understanding the tax rules
Whether giving or receiving, there can be a lot of decisions to make and tax rules to know about. Making the right financial choices is hard enough anyway, but when a member of the family has died it can be even more difficult to think clearly. And there might be some delicate conversations to be had around intergenerational finances. After all, many of us would prefer to avoid talking about either money or death, so inheritance planning is a double whammy.
An adviser can help facilitate some of these conversations, helping you to understand how to best protect both you and your family. Understanding how much money is involved and where it fits in as part of your long-term plans can provide peace of mind and help ensure that your money passes to your loved ones in the most effective way, without compromising your own financial security.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority.
About the author
Tanita works in the Technical Consultancy team and has been at St. James’s Place for over seven years.
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