How can we leave assets to our children without incurring excessive IHT?

These investors want to leave assets to their family without incurring a lot of IHT

Making lifetime gifts and putting assets into trusts could reduce potential tax

Although they have a growth focus they should add some more defensive investments to their portfolio

Leave assets to family tax efficiently, save into Junior Isas to enable grandchildren to go to university or start a business without debt, build up deposits for grandchildren to buy homes, advise children on how to use wealth they receive.

Rob and his wife are aged 72 and 73, and have been retired since they were 60. They receive former workplace defined benefit pensions, an additional voluntary contribution and state pensions. These give them an income of £50,000 a year after tax on which they live comfortably. They fund expenses such as travel from their pensions income and occasionally by taking profits on investments in their individual savings accounts (Isas).

They have two children aged 47 and 45, and four grandchildren between the ages of five and 10.

Their home is worth about £550,000 and mortgage free.

“We hope to avoid excessive care costs in later life as our aim is to leave our assets to our descendants without excessive inheritance tax (IHT) liabilities,” says Rob. “But we wondered what our children should do with the assets that we pass onto them after our deaths. They work in education, and the younger earns about the UK median salary of £32,000 a year and the other earns more. We have already given them both significant sums of money as deposits to buy homes and make further gifts to them when they want to make major home improvements.

“We thought that ways our children could use the wealth they will receive having fun with 5 per cent to 10 per cent of it, setting aside 5 per cent as an emergency cash fund and holding 25 per cent of it in an Isa to fund holidays. They could also use it for home improvements, family medical and dental insurance, a holiday home or holiday property bond, cars, and fully using their annual Isa allowances. Another option would be to use the money we pass onto them to maximise annual pension contributions, maybe contributing to their workplace schemes, though I think they would be better off putting it into self invested personal pensions (Sipps).

Or they could gift the money they receive to their children by putting it into Isas or Sipps for them, or buying them properties.

“We will also stress that they should not lose the value of their inheritances to inflation or squander them.

“We also contribute to junior Isas for our four grandchildren. As post-war babies, our parents made us very aware of debt problems, so we hope that these junior Isas will enable our grandchildren to go to university or start a business without taking on debt. We also hope that each of our grandchildren will have a deposit to buy a home. So in 2016, we set up a small discretionary trust to fund these and it now has a value of about £207,000.

“We manage our own Isas and grandchildren’s investment accounts which are invested in funds at the more adventurous end of the risk scale. I would hate for the value of our investments to fall by more than 20 per cent but the capital invested is surplus to our financial needs so I take risks. And as the investments are for the longer term benefit of our children and grandchildren we can take a long view.

“We started investing when BT (BT.A) was privatised in 1984 and have made very good returns at times during the past three decades, though have also had a few poor years. A friend has described my investment approach as ‘greedy and impatient,’ and I think I trade too often. Recent trades include selling Fidelity China Special Situations (FCSS) , FSSA Greater China Growth (GB0033874321) and JOHCM UK Dynamic (GB00BDZRJ101) , and some of our holding in Baillie Gifford American (GB0006061963) . And I have added Mobius Investment Trust (MMIT) and Vietnam Enterprise Investments (VEIL) . I rebalanced our portfolios at the end of the year – the reason why many of the values look ‘neat.’ Holding Value (£) % of the portfolio Cash 144,000 22.29 Baillie Gifford American ( GB0006061963) 33,000 5.11 Baillie Gifford Pacific (GB0006063233) 31,000 4.8 Fidelity Global Technology (LU1033663649) 30,000 4.64 Baillie Gifford British Smaller Companies (GB0005931356) 15,000 2.32 NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS […]

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