Planning to pass on an inheritance? Five steps you must take for your children | Personal Finance | Finance

A windfall of wealth transfer is currently taking place in the UK, the largest of its kind in history. A hefty £5.5trillion will be passed down the generations by 2050 – described as the Great Wealth Transfer. Intergenerational wealth transfer can be complex, it is one of the key financial areas that needs robust planning. Passing on assets can come with a sizeable amount of inheritance tax, currently at 40% on the part of the estate that’s above the £325,000 threshold.

Although this increases to £500,000 with the Residence Nil Rate Band (for those owning a property that is being left to a direct descendant). So, up to £1million can be passed on tax-free if a spouse or civil partner didn’t use up their threshold on death. However, estates worth over £2million lose the Residence Nil Rate Band – £1 for every £2 over the threshold, meaning there will be no extra allowance if it’s worth over £2.2million. This is why It is important you have a strategy, which could be passing on assets during your lifetime or after you’ve passed away.

There isn’t one size fits all, your strategy will depend on your goals and circumstances and your family’s situation.

Plus, like other financial areas, it is not just a case of sort and forget. You need to reassess your plans ongoing, to ensure they continue to meet you and your family’s changing needs, and any sneaky tax or inheritance rules changes the Government may bring in during your lifetime.

This may now be the case with pension pots. A lot of people thought they had things sorted, simply leaving unspent pensions to younger generations.

But that may not be the best option as new rules in 2027 mean pension pots will be included for inheritance purposes.

There are lots of things to consider from ensuring your wealth goes to the people you want it to, being as tax efficient as you can and deciding when you want to transfer wealth. Expert advice from a good financial planner will help you work through all these things.

Research from the Money and Pensions Service shows that more than half of adults aged 50 to 64 don’t have a will. One of the top reasons for not having a will is people believing they don’t have sufficient wealth. But a will won’t just decide how your estate is divided up.

It means you have a say over who will look after your dependants, for under 18s you can appoint legal guardians. If you have pets, you can leave instructions on how they will be looked after if you pass and the same with digital assets such as cryptocurrency.

A will is a vital document and the basis for ensuring your loved ones are protected after you have gone, and your estate is divided in accordance with your wishes.

Without a will you could risk disinheriting the people you love and those who depend on you the most.

Like other vital documents you need to ensure your will is kept up to date to account for life events such as marriage, divorce and death.

As important as having a will is being prepared in case you cannot make decisions for yourself. A Lasting Power of Attorney, which nominates a relative or trusted friend to look after your affairs and make decisions on your behalf if you lose your capacity, needs to be sorted while you still have mental capacity. There are two types covering property and finance and health and welfare.

It can be difficult starting the conversation but you need to help arm younger generations with some financial know-how so they can make better informed decisions around inherited wealth.

It can be daunting suddenly having a large sum of money or other assets and no idea what to do for the best.

This may include introducing them to your financial adviser so they can manage their inheritance with confidence and more responsibly.

There are many strategies available to help reduce the tax burden for you and your dependants. From using up allowances, such as ISA saving, to gifting during your lifetime, setting up trusts and transferring wealth to your spouse or civil partner.

You can gift up to £3,000 a year without any tax implications. A relatively unused allowance is the ability to gift out of surplus income, there is no limit to what you can gift away from income that you do not require. You can also transfer your wealth during your lifetime but bear in mind that gifts including money (lump sums), property and personal items, can be subject to inheritance tax if you pass away within seven years of making them.

There are lots of types of trusts you can set up to leave wealth to younger generations.

Such as putting money away bit by bit so younger generations benefit when they need the help most for education or buying a first home.

Spending money during your lifetime on activities such as holidays and events, means you get to enjoy yourself, while creating lasting memories with your loved ones. And it benefits everyone by lowering the tax payable on your estate.

One of the least complicated ways to avoid inheritance tax is to transfer assets to your spouse or civil partner. It is completely tax free, the same as any inheritance left to your partner.

As with everything financial it is not straight-forward passing on assets through the generations. What is right for you will depend on your wealth, your personal circumstances and that of the rest of your family.

A financial adviser can explain all of your options, the tax implications and give you guidance on strategies around pensions and tax-relief on investments.

Frankie Smith runs FSWM (fswm.uk), an independent wealth management firm, and Frankie’s, a networking organisation that runs regular events where people can improve their financial know-how