How to pass on wealth (and why you might be owed an IHT refund)

More people want to financially support their loved ones but don't know all their options. We reveal what you need to know – and explain why there's been a recent surge in families reclaiming some Inheritance Tax.

There’s nothing like a global pandemic to really focus the mind and get us to think about what’s important.

According to a host of financial advisers, this has resulted in swathes of older people getting in contact to discuss how they can provide some financial support to their younger relatives.

It makes sense.

Younger people were already in a less than attractive financial position compared to their parents and grandparents, facing less secure employment and expensive housing, and the fallout from COVID-19 is only going to make this situation worse.

Older relatives are more likely to be in a rather more secure financial position.

Just look at property: over-65s are sat on property wealth worth an extraordinary £1.133 trillion, according to research by equity release firm Key.

And there are all sorts of options available to those who want to pass cash on to loved ones, with different advantages to each.

So it's important you choose the one that's best for your financial needs.

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Are you owed a tax refund?

But before we delve into the different strategies, it's worth stressing that some families who have recently suffered a bereavement could be eligible to reclaim some Inheritance Tax (IHT).

This is primarily because of the sharp drop in share prices caused by the pandemic. 

As NFU Mutual points out, IHT is assessed on the value of a person’s estate on the date of death and the tax must normally be paid within six months.

"If, when the executors come to sell any quoted shares or other qualifying investments including unit trusts and OEIC’s the price has fallen, they can reclaim the overpaid tax by submitting an IHT35 form to HMRC."

The number of people successfully reclaiming for share losses has more than doubled in the last two years alone and, following the stock market crash in February and March, many more executors will be able to make a claim, the firm adds.

While not applicable at this very moment, it's worth pointing out that Inheritance Tax on property is paid based on the value at the time of death, and can be reclaimed if the property sells for less within four years.

So this could be worth keeping in mind for the coming years given the likelihood that house prices will fall.

Unsurprisingly, neither the refund for shares or property is automatic, so you need to actively make a claim.

Learn more about getting your money back on these two Government pages:

• How to reclaim a loss on shares;
• How to reclaim a loss on property/land.

Passing on wealth: give it away

Now that we've run through why some families might be due tax refunds now, let's look in detail at how you can start planning to pass on wealth in the most efficient way.

For those looking to plan a long term, perhaps the most straightforward way to pass on some assets to a loved one is simply to hand them over in the form of a gift.

Indeed, with so many housing transactions reliant on financial support from the ‘Bank of Mum and Dad’, this is happening on a regular basis already, with gifts from parents helping to build their child’s deposit.

What’s more, there are annual gift allowances we all enjoy which allow us to hand money over to family and friends and which will reduce our eventual IHT liability.

For example, in addition to a £3,000 annual gift limit, we can also gift up to £250 per person every year as long as an exemption hasn’t been used for the same person.

On top of that, there are also gifting rules over giving cash to loved ones on their wedding day, which can again help with your IHT bill.

Even gifts above and beyond those allowances may fall outside of IHT liability ‒ what’s known as ‘potentially exempt transfers’ ‒ so long as you live for seven years after making them.

Bizarrely, even after you’ve given something away, it can still be classed as part of your estate when you die.

For more details, check out our guide on How to cut your Inheritance Tax bill.

What about assets?

It’s one thing to hand over cash, but what if you want to hand over assets like investments in stocks and shares?

These sorts of transfers will generally be liable for Capital Gains Tax (CGT), unless you are passing them to your partner.

It’s worth remembering that everyone enjoys an annual CGT allowance, which currently stands at £12,300.

You could also ‘manage’ transfer between you and your partner by initially transferring ownership of some of those assets to them, before they pass them onto your children or grandchildren, without the taxman taking a slice.

Anything that is subject to CGT will incur a 20% tax bill.

Read our guide on CGT and how to reduce your bills.

Use a trust

Another option is to make use of a form of trust.

You effectively hand over ownership of a certain amount of money, or specific assets, to a group of trustees before it is then passed onto a relative at a predetermined point.

So, for example, you could have £10,000 that you want to set aside for your grandchild.

But as they are only 10, they aren’t really of an age to handle that sort of money.

Instead, you can put it into a trust, with the terms that the money will be handed to that child once they turn 21. And the trustees could be the child’s parents.

Trusts come in all sorts of different forms and can be useful in a host of varied ways, from helping to pay for a grandchild’s education to protecting assets following a divorce.

For more on how they can work for you if you’re looking to hand over assets to a loved one, read our comprehensive guide.

Don't run out of cash in retirement: reader Fisher's guide to retiring comfortably

Do it together

If you want to help a loved one purchase a property, for example, then you have a wide range of options open to you beyond simply handing them a chunk of cash to go towards the deposit.

For example, while guarantor mortgages are no longer particularly prevalent, there are Joint Borrower Sole Proprietor mortgages.

This is effectively where you are named as a borrower alongside your relative ‒ likely helping them qualify for a better deal as you may have a higher salary ‒ but they are the ones that live there.

Obviously, if they fall behind on the mortgage, then you will be responsible for the repayments, so it’s not without its risks.

There are also mortgages where you move your savings into an account provided by the mortgage lender to serve as a sort of deposit, helping your loved one purchase without ever having to give them the money outright.

You may also be able to do something similar with a charge against your own property.

Effectively, you can use those assets to support your loved ones without giving up control of them. And then, if you choose, you could hand those assets over properly at a later date, essentially using them to help family twice over.

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