Ten Ways To Transfer Wealth

If you want to give your nearest and dearest a helping hand, here are ten tax-efficient ways to do so.

With a little discipline, and a few pounds to set aside each month, it's possible to amass an impressively large lump sum via regular saving or investing.

What's more, young adults face an increasingly expensive financial future, thanks to big hikes in the cost of houses, university education and marriage. Hence, regular saving is a particularly good idea if you wish to create a nest egg to be handed over to children, grandchildren or other youngsters when they reach adulthood.

However, as always, the taxman is lurking in the wings, waiting to pounce on innocent individuals who don't know how to play by his rules! So, if you'd like to maximise the capital that you put aside for relatives, read the following ten tips, courtesy of The Motley Fool and accounting, business and tax advisory group Vantis:

1. Children have tax allowances, too

We all know that adults have an annual tax-free allowance, but children can also take advantage of this tax break. In the 2006/07 tax year, a child can earn up to £5,035 without paying tax on this income -- sadly, income from capital given by a parent doesn't fall into this category. In addition, children also enjoy the usual Capital Gains Tax allowance, which is £8,800 this tax year. For more information on children and tax allowances, read Make Your Child Wealthy.

2. Use a Child Trust Fund (CTF)

Any child born after 31 August 2002 receives a voucher from HM Revenue & Customs which must be saved or invested in a Child Trust Fund. However, a CTF is also a tax shelter into which parents, relatives and friends can contribute up to £1,200 a year until a child reaches eighteen. To learn more about this tax haven for kids, read The Three-Year-Old Investor.

3. Children can have pensions, too

As I confirmed in this article, an adult can contribute to a Stakeholder pension or Self-invested Personal Pension (SIPP) on behalf of a child. What's more, contributions of up to £2,808 per tax year attract basic-rate tax relief, which turns 78p into a pound. Thus, net payments of £234 per month add up to a gross contribution of £3,600 per year, thanks to £792 of tax relief. Result!

4. Trust in a Trust

My son is an investor in a low-cost stock-market fund known as an index tracker. Thanks to an instrument known as a bare trust, his mother retains control over this investment, but any capital gains he makes are treated as his own. Bare trusts are especially useful for grandparents, because any tax on income earned is calculated at the child's rate, yet the investment is controlled by adults. However, the child takes total control of the trust on his/her eighteenth birthday, so beware! You can learn more about trusts here.

5. Make small gifts

Each tax year, individuals may make gifts of up to £250 to any number of people, all of which will escape Inheritance Tax (IHT). For example, two grandparents giving each of their six grandchildren £250 a year (an annual total of £3,000) over twenty years could reduce their combined estates by £60,000 and reduced their combined IHT bill by up to £24,000.

6. Use your annual exemption for gifts

Each tax year, an individual can give up to £3,000 to an individual or trust of their choice. Any unused exemption from the previous tax year can be carried forward to the current tax year, but no further. Over two decades, a husband and wife could together gift up to £126,000 out of their combined estates, creating a potential IHT saving of £50,400.

7. Make regular gifts out of income

If your income comfortably exceeds your outgoings and usual needs, then you can make regular cash gifts to anyone of your choice. The donor must show that the gifts are habitual, are made from after-tax income, and leave enough income to maintain his/her usual standard of living. Although this loophole can provide significant IHT savings, it is an under-used option, particularly among high earners.

8 Get a PET

Potentially Exempt Transfers (PETs) are great for both donor and recipient. If you survive for seven years after making a gift to an individual, the value of the gift falls outside of your estate when IHT is calculated -- provided that you don't retain a direct or indirect benefit in the assets being gifted. There is no limit to the value of a PET, so a substantial sum (even the majority of a person's assets) could be passed down in this way. Even surviving the gift by three years provides tapered relief from IHT, which will reduce your tax bill on death.

9. Present a wedding gift

Wedding gifts can be tax-efficient as well as generous! Each parent can gift £5,000 to a child on the occasion of his/her marriage (known as a 'gift in consideration of marriage') and avoid IHT on this sum. To avoid IHT in this way, grandparents or more distant relatives can gift £2,500; for anyone else, the limit is £1,000.

10. Pass wealth to your spouse

Married couples and same-sex civil partners can take advantage of IHT-exempt transfers between spouses, whether made during their lifetime or on death. If one spouse has greater assets than the other, s/he can transfer assets to the value of the IHT nil-rate limit (currently £285,000) in order to minimise the amount of IHT payable on the death of the surviving spouse.

Indeed, tax-efficient Wills costing just a few hundred pounds can reduce an estate's IHT liability by up to £114,000. My wife and I had our Wills drafted by a friendly Fool, Mark Goodson of Frederick W Goodson, an experienced member of the Society of Trust and Estate Practitioners, STEP.

Bonus tip: take aim at AIM

As I'm feeling generous, here's an extra tip for you. Investments in many Alternative Investment Market (AIM) shares are exempt from IHT after being held for two years. Hence, you could create a portfolio of AIM shares to pass onto relatives via your Will (or into trusts).

However, not all AIM shares qualify for this exemption -- companies, for example, that themselves trade in shares wouldn't qualify -- so you need to be careful. What's more, if the nature of a company's business changes, a share that previously qualified for the exemption may change its status.

AIM shares can also be volatile and illiquid (difficult to buy and sell in large numbers.) Given these issues, you should take expert advice from a specialist investment manager before proceeding.

That's it from me. Here's to more wealth and less tax!

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