Frequently asked questions about passing on wealth

As the Private Wealth Law Firm, we have spent many years supporting our clients to pass down their wealth to future generations as smoothly and tax-efficiently as possible. Although every client’s needs and experiences are unique, there are some questions which we find come up time and time again.

In this blog, we’ll explore some of the most common queries we receive from clients looking to pass on wealth and assets whilst minimising their tax liability.

1. I want to give my rental property to my children; can I do that without a large tax bill?

Answer:

Transferring a rental property to your children can potentially trigger significant tax implications. The key areas to consider are Inheritance Tax (IHT) and Capital Gains Tax (CGT).

Inheritance Tax: If you give away the property as a gift, it might be subject to IHT if you pass away within seven years of the transfer. This is known as a Potentially Exempt Transfer (PET). If you survive for seven years after the gift, it is generally exempt from IHT. However, you need to be careful that you don’t receive any of the rental income, as this could be classed as a gift with reservation of benefit (see more about this later). If you pass away within this period, the property’s value will be included in your estate and taxed according to the IHT thresholds and rates applicable at the time.

Capital Gains Tax: When you gift a property, CGT may be applicable based on the property’s market value at the time of the gift. The gain is calculated as the difference between the market value at the time of the gift and the original purchase price. Tax is payable on this gain; however, there are certain circumstances where you can ‘holdover’ the gain so that the tax is only payable when your children go on to sell the property in the future.

It’s crucial to seek tailored legal advice to help you navigate these complexities and explore any potential reliefs or exemptions available.

2. What are the consequences of paying my grandchildren’s school fees?

Answer:

Paying your grandchildren’s school fees can be considered a regular gift from income – an inheritance tax exemption that applies when you are giving gifts from your income, rather than your capital. If you can demonstrate that these payments are made out of your surplus income, and do not eat into your capital, they may not be subject to Inheritance Tax (IHT).

To qualify as exempt, the payments must be regular, part of your usual expenditure and not affect your standard of living. It’s important to keep detailed records of these payments to prove they are regular and do not impact your financial wellbeing.

These payments won’t usually incur a tax liability, but they do need to be documented appropriately to avoid any potential IHT implications in the future.

3. How can I minimise my tax liability when passing on my business?

Answer:

When passing on your business to your children or grandchildren, you might be able to benefit from Business Property Relief (BPR). BPR can reduce the value of the business for Inheritance Tax (IHT) purposes by up to 100%, depending on how the business is structured and operated.

To qualify for BPR, the business must be involved in trading activities – not merely holding investments – and must be a going concern. Additionally, the relief applies to the transfer of shares or an interest in the business. There are specific conditions and criteria that must be met to ensure eligibility, so professional advice is essential to navigate this process and ensure that BPR is applied correctly. Read more here.

4. My son isn’t good with money. How can I make sure he doesn’t squander his inheritance when I’m gone?

Answer:

To ensure that your son manages his inheritance wisely, you might wish to consider setting up a discretionary trust either during your lifetime or in your will. A discretionary trust allows you to specify that your son (or other beneficiaries) can receive income and/or capital from the trust, but the trustees have discretion over when and how much to distribute.

This means you can appoint trustees to oversee the trust and ensure that distributions are made in a controlled manner, potentially protecting the assets from being mismanaged or squandered. This arrangement provides flexibility and protection, as the trustees can adapt their approach based on the beneficiary’s circumstances and needs. Read more here.

5. My granddaughter is getting married and I’ve heard I can give her some money to help out – what are the IHT rules?

Answer:

You can make a financial gift to your granddaughter for her wedding, which may be exempt from Inheritance Tax (IHT) under the wedding exemption. For the 2024 tax year, the exemption allows you to give up to £5,000 to each child, £2,500 to each grandchild, and £1,000 to each other individual as a wedding gift without incurring IHT.

In addition to the wedding exemption, there are also small gift exemptions which allow you to give up to £250 per person per year without incurring IHT, as long as this does not exceed the annual exemption limit.

Be sure to keep proper records of these gifts to ensure they are properly accounted for in case of any future tax assessments.

6. Will giving my house to my children now avoid losing it to pay care fees?

Answer:

Transferring your house to your children to avoid paying care fees may not be as straightforward as it seems due to two particular anti-tax avoidance measures designed: gifts with reservation of benefit and deprivation of assets.

Gifts with reservation of benefit: If you transfer your home to your children but continue to live in it without paying full market rent, the transfer might be deemed invalid for IHT purposes. This means that the property could still be considered part of your estate for IHT purposes and, potentially, for care fee assessments.

Deprivation of assets: If you have given away your home with the express purpose of avoiding care fees, this is likely to be seen as deliberate deprivation of assets by the local authority. If so, this may affect the care funding you receive. If it is determined that you made the gift solely to avoid paying for care, the local authority may still include the value of the property in their assessment.

There are some steps you can take now to mitigate care home fees, so it’s advisable to seek legal and financial advice before making such transfers to ensure you understand all the implications and comply with the relevant rules and regulations.

Ask an expert

Inheritance Tax rules can be complex, meaning that it is highly advisable to seek expert support when making important decisions about how to transfer your wealth for maximum financial advantage. With a wide range of reliefs, exemptions and tax-avoidance rules to consider, professional advice can ensure that you pass on your wealth in the most tax-efficient way possible, maximising the legacy you are able to leave behind for your loved ones.

Should you wish to discuss issues relating to intergenerational wealth transfer with a specialist lawyer, we would be delighted to help. Please contact our Partner and Tax & Trusts specialist, Tony Brownlie, on 0203 871 0087, or email tony.brownlie@attwaters.co.uk to discuss your matter.