The Best Ways to Pass on Wealth

Rags to riches to rags again in three generations is a well-known cautionary tale that exists in different versions across many cultures. It describes the idea that the first generation builds the wealth, the second maintains it and the third squanders it. 

Data backs up the truth of the proverb. A 20-year study involving over 3,200 families found that seven in 10 tend to lose their fortunes by the second generation, while nine in 10 lose it by the third.¹ 

But while this tale focuses on whether younger generations value the wealth they’re given, in fact this is only part of the picture when transferring wealth successfully. Equally important are how you balance personal, family and philanthropic goals as you plan how to transfer your wealth. 

At the heart of this is your Will. Your Will puts your wishes in writing, making clear who you want to benefit from your estate. Without a Will, your estate will be distributed according to the laws of intestacy, which means that you have no direction over who benefits and the distribution may not be tax efficient. 

Beyond your Will, Trusts provide a range of options for passing on wealth during your lifetime and on death in ways that give you greater control and can be tax efficient. Using them successfully requires planning ahead over several years, possibly involving the younger generations in your plans. 

You may also set up a broad wealth strategy that establishes a pattern of regular gifting. If a child has regular help over time, for example for their first car and first house, they’re more likely to respect the wealth and less likely to squander it. Transferring wealth in this way can also have tax advantages. 

Understanding Wealth Transfer for High-Net-Worth Individuals 

Clarifying your priorities and concerns around Wealth Transfer

Passing on wealth is about ensuring that the right people benefit in the right ways. You want to know that your wishes will be granted after you’ve gone. 

Talking about wealth raises a lot of questions – both practical and emotional. Are you worried about what your children will do with any assets they inherit? They could be about to go through a divorce or have started a business that looks likely to fail. Additionally, is there a family business you want to protect?

There’s a lot to think about if you have a large estate. Whatever your concerns and questions, there will be ways to answer them. It’s never too early to start planning Working out your priorities and putting plans into place takes time. 

It’s important that you understand your options. Once you do you’ll discover that there are different ways to pass on wealth that can be tailored to your concerns and circumstances. If you’re worried about losing control of your wealth, there are ways that may offer you to plan for inheritance tax without gifting the money outright that have long been part of succession planning. 

The role of Trusts in Passing on Wealth 

Trusts have a time honoured role in passing on wealth. They help you to transfer wealth in a way that’s considered and controlled with some inheritance tax savings. Not only do they work well for large estates but also for complex family situations – providing flexibility in families where, for example, there may be second marriages and step children.

For example, a trust allows money and assets to be held for a son or daughter until he or she reaches an age that you consider responsible. This is just one of the practical ways that trusts can be used for succession planning.

Take the example of grandparents using what’s called a bare trust to gift money to children for paying school or university fees. As long as the money hasn’t been gifted by parents, a bare trust may allow  advantage of treating the trust assets to be treated as though they belonged to the child for tax purposes. They can use their personal tax allowances and exemptions, which otherwise may be lost.

But setting up a trust is not for everyone. It may require legal advice and there are generally initial and ongoing costs. What’s more, assets in a trust may be subject to tax and it’s important that you understand how trusts operate as they are long-term and potentially complex planning vehicles.

Trusts could play an important role in estate planning for high net worth individuals, but they may not be suitable for everyone. At Brown Shipley, we work closely with our clients and their professional advisers to determine if a trust is appropriate for your specific circumstances.

Key Tax Considerations in Wealth Transfer 

Understanding Tax Thresholds and Reliefs in Estate Planning

Everyone wants to pass on as much as possible to their loved ones and chosen charities when they die. With prudent planning ahead, you can mitigate the amount of inheritance tax due on your estate and leave a bigger legacy.

Inheritance tax is charged on the value of your estate. That includes your house and any other properties you own, savings, investments and most other assets.

But the government has introduced a complex set of allowances over time that enable you to pass on a certain amount before tax is levied. Most notably, everyone has a nil rate band of £325,000,²  meaning your loved ones may inherit this amount tax free, depending on your circumstances and prevailing rules. If your estate is worth more, you may have to pay inheritance tax at 40% above that level.

However, there are fairly complicated additional allowances that can further reduce your successors’ tax bill. There’s usually no inheritance tax to pay if you leave everything above the £325,000 nil rate band to your spouse or civil partner, as long as you are both UK resident. When the surviving spouse or civil partner dies, the nil rate band can be combined so that beneficiaries have a tax free allowance of £650,000.

There is a further allowance of £175,000 applying to the family home – the so-called residence nil rate band. It potentially allows married couples or civil partners to pass on up to £1m without inheritance tax being paid. However, there are conditions and the residence nil rate band is gradually withdrawn from estates valued at over £2m.

Efficient Estate and Inheritance Tax Planning

There are many tax-efficient ways to pass on your wealth to the people you care about. We have already discussed trusts but gifts in your lifetime can also help.

Everyone has a gifting allowance of £3,000 in a tax year that’s exempt from inheritance tax. This allowance can be carried forward from the previous year if it’s not been used, meaning that you can potentially give up to £6,000 in a year. However, you can only carry forward an unused allowance for one year.

Additionally, you can make as many small gifts of up to £250 as you like, although not to the same person or the person who benefited from your gifting allowance.

Wedding and civil partnership gifts are also exempt from inheritance tax within certain limits. Under this exemption, you can give:

• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £2,500 to your spouse or civil partner to be
• £1,000 to any other person.

If you want to make gifts out of your surplus income, you can do so without limit. To qualify the gifts you make must:

• Have been made from income, not capital
• Not have impacted your usual standard of living
• Be regular, such as monthly or annually.

One of the most effective ways to pass on wealth and mitigate Inheritance Tax (IHT) liability is through lifetime gifting. There is no limit to how much you can give away during your lifetime. Crucially, if you survive for at least seven years after making a gift, its value is typically excluded from your estate for IHT purposes.

However, if you pass away within seven years of making a gift, it may still be subject to Inheritance Tax. Gifts made within the first three years are generally taxed at the full 40% rate. Between years three and seven, taper relief may apply, which can reduce the tax owed. The final tax impact depends on the size of the gift and how much of your nil-rate band remains unused.

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Charitable Giving and Philanthropy: Incorporating Giving into Your Wealth Transfer

Strategic Gifting During Your Lifetime

Supporting a favourite charity is close to many peoples’ hearts. The government encourages you to give to a charity by offering tax incentives for gifts both during your lifetime and as part of your legacy.

The simplest way to give money during your lifetime and save on tax is through Gift Aid, a government scheme that allows a charity to uplift the value of your donation by reclaiming the basic rate tax paid on the donation.

It’s also efficient to give away shares and property. You can often do so without any capital gains tax or income tax implications – although it’s advisable to check that the charity can accept non-cash donations.

If you want to consider a permanent legacy, there are tax-efficient structures available. Alternatively, you could choose what’s called a donor-advised fund.

Setting Up a Family Foundation for Long-Term Impact

If you want to give a very large amount and take an active role in philanthropy, you could set up a foundation or a charitable trust. You can choose how much you want to be involved and whether to recruit professionals to help you manage it. You might want to bring in your children and grandchildren as trustees so you know that your care and compassion will live on.

Many foundations are supported by an investment portfolio, which helps provide funding for their activities. At Brown Shipley, we can discuss how this could be managed ethically and sustainably in a way that does no harm.

Practical Strategies for Passing on Wealth Without Compromising Family Relationships

Of course, passing on wealth is not just about practicalities and tax efficiency. It’s about doing so in a way that balances personal, family and philanthropic goals.

Your Will can go a long way towards safeguarding family relationships. Not only does it make clear who you want to benefit from your estate but also it appoints people to manage your estate in a way that hopefully avoids family feuds.

Talking through your succession planning with the next generation can also help. You can ask them what would help them the most. Would they like help repaying debt, paying school fees or saving for retirement? At the same time, making people aware of what’s in your Will avoids surprises.

It might not be easy talking about what happens when you die, but doing so can lead to very positive results. Talking together now means everyone knows what will come next.

What’s more, planning ahead and making regular gifts may help your loved ones understand the value of money while also mitigating tax. 

It’s a good way of preserving your legacy as far as possible through your children and grandchildren – reducing the chances of a tale of rags to riches and back in three generations. 

There are many ways to pass on your wealth. Planning ahead helps to ensure you’ll have a successful legacy.

Making informed decisions about how you pass on your wealth is an important and empowering thing to do. We’re here to help you explore your options, start the conversations and put plans in place.

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