When it comes to inheritance tax planning, starting early can save your loved ones a fortune.
With years ahead of you, you can make use of annual allowances several times over.
And if you make gifts while you’re in good health, they will not be subject to inheritance tax (IHT) so long as you live another seven years.
Not to mention the fact that younger generations can often do with a bit of a financial leg-up from loved ones these days.
But talking about money can be awkward at the best of times. So, how do you bring up the conversation, a subject loaded with emotion and sensitivity?
Money Mail has asked the experts how best to get your loved ones to hand over an inheritance early – and also how to discuss your legacy with your children.
Don’t delay
Inheritance tax has never been a more pressing topic. Last year families paid a record £8billion in IHT and the bill is only getting bigger as thresholds remain frozen until at least 2031.
Currently, individuals can pass on £325,000 tax-free at death and a further £175,000 when leaving a main home to a direct descendent.
Things will worsen when pensions are brought into the scope of inheritance tax from April 2027.
Most think the best age to start estate planning is 44, found a survey of 2,000 people by Octopus Investments. Yet 86 per cent of those aged 45 to 49 have not started, and 70 per cent of those in their 50s.
It found that wealthy families who start at 50 and make use of allowances and exemptions could pass £397,000 more on average to loved ones than waiting until 70.
From April next year, pensions will be ensnared in the inheritance tax net for the first time
Choose the right moment
It might be tempting to raise the subject at the Christmas dinner table when the whole family is together, but a big event with emotions already running high is not right for a sensitive conversation.
Simonne Gnessen, founder of Wise Monkey Financial Coaching, says: ‘Choose a quiet setting, without an agenda or any time pressure. Avoid discussing it during a moment of crisis, for example if someone is unwell.’
Be practical
Focusing on the practical can make tackling an emotive topic easier, says Gnessen. Start by asking if they have an up-to-date will, lasting powers of attorney paperwork, and discussing care preferences rather than going straight into inheritance tax.
She says: ‘This puts the focus on their wishes and means you’re not leaving important decisions until there is a crisis. It may then feel natural to ask what they want their money to do as they age and whether they have had advice.’
Give them time
Don’t expect an answer on the spot. Parents may need some thinking time. ‘This is why tone of conversation is important,’ says Gnessen.
‘Make sure there is tenderness and care, and no sense of expectation or urgency.’
Graham Wells, financial coach at GroWiser, says couples may have different ideas that they need to discuss: ‘One may want to treat their children equally, while the other may think it’s more important to provide support based on the children’s individual needs. Neither is right or wrong.’
Lay ground rules
Agree what the money is meant for in advance. Everyone can gift up to £3,000 every tax year.
Plus, if you didn’t use one year’s allowance you can carry it forward to the next tax year, but no further. It means a couple could give away up to £12,000 in one tax year.
Those making a gift they had intended to be used for a house deposit may be resentful if it is then frittered away.
Wells says: ‘The families who navigate these conversations best tend to talk openly about their values, expectations and hopes. These conversations can often be more important than the tax planning itself.’
Open discussions are equally useful for the person receiving the gift as it removes any uncertainty.
Well says: ‘Recipients often feel a heavy burden of responsibility or guilt after receiving an inheritance, like they don’t want or deserve the money.’
By using annuities, those with large pension pots can pass them on to family members tax free – in the form of an income they receive for the rest of their lives
Make a plan
For many families, a gradual approach will be more effective and palatable than a one-off lump sum gift. It means the plan can adapt to people’s needs as they age. But this means having conversations early.
Ian Dyall, of advice firm Evelyn Partners, says: ‘The longer you leave it, the more aggressive you need to be with your planning and the scarier it becomes.
If you start early, you can take baby steps initially. Many people find they don’t miss the money and are more confident about going further.’
The rule for gifts given out of surplus income can be a great tool here – and is arguably the most generous allowance.
It is known as ‘gifts out of normal expenditure’ and allows you to give away an unlimited amount free of inheritance tax.
However, there are strict criteria. The payment must be regular, out of your income and must not affect your standard of living – and you must keep good records.
For example, someone giving away £20,000 a year over a decade could remove £200,000 from their estate and reduce a potential inheritance tax bill by £80,000.
Don’t be offended
There are plenty of reasons that parents and grandparents may be reluctant to make gifts too early, says Dyall.
Fears about care costs in later life and their own financial security are real issues. ‘Others might be concerned about damaging their children’s ambition by giving them everything they need,’ he adds.
James Ballinger, from advice firm TrinityBridge, says: ‘It’s important to understand that gifts are irrevocable and, for larger sums, you’ll need to wait seven years before they are exempt from IHT.’
Enjoy helping loved ones
The concept of a ‘living inheritance’ has become more popular, as young people are facing bigger financial hurdles than ever, but are waiting longer to inherit as life expectancy increases.
Financial gifts are often most valuable when people are establishing themselves and raising a family, and gifting early means parents and grandparents get to see their money being enjoyed.
Ballinger says: ‘There’s something to be said for seeing the impact of your wealth.’
How to say no…
You should never feel obliged to hand over money that you don’t want to. After all, it is yours.
Make sure you have as much as you need for the lifestyle you want – now and in the future. Bear in mind that should you need care in later life, the bills quickly add up.
Wells says: ‘Children may have the perception that you have more money than you do. Being open and honest can help.
‘Cash flow modelling to work out exactly what you might need can also help – both to come up with a plan and for transparency.’
Some parents may worry that giving money to children will diminish their work ethic or end up in the wrong hands, such as if they divorce.
‘Bringing up these subjects is difficult,’ adds Wells. ‘Open dialogue is often best, but what this looks like will depend on the dynamics in your family.’