There are many reasons that you may want to pass assets on to your children, grandchildren or others. You may wish to help your children to buy a property, ensure that they are financially secure, or perhaps provide for your grandchildren’s education. You may also want to give assets away as early as possible so that on your death they are not charged to 40% UK Inheritance Tax (IHT).
There are a number of ways you can ensure that assets are passed down efficiently to future generations. The most straightforward is an outright gift. However you may be reluctant to make such a gift for a number of reasons:
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For these reasons careful estate planning often includes the use of vehicles that are designed to facilitate a gift but at the same time allow you to retain some control over how the gifted assets are used and invested.
The best example of this is the trust, but others include Family Limited Partnerships and Family Investment Companies.
You make a gift into a trust, typically established to benefit your children and/or grandchildren (known as the beneficiaries). You, your spouse and other family members can act as trustees and you control the distribution of income and capital to these beneficiaries.
The advantage to you is that you have made a gift which will be outside of IHT after seven years. However, since 2006, any gift to a trust in excess of the inheritance tax nil rate band, currently GBP 325,000 per person, has attracted an immediate charge to IHT at 20%. Therefore you should carefully consider whether a trust could meet your needs.
Similar in many ways to trusts, one or more parents establish an FLP appointing themselves as senior partners and transfer assets to it. At a future date they bring their children in as junior partners and grant them a percentage partnership share. At that point a share of the family assets is transferred to the next generation, but importantly the assets cannot leave the FLP without the agreement of the senior partners.
The ultimate objective is often the same as with a trust or FLP: the ability to make a gift but control access to the gifted assets. In the case of a FIC, different share classes are typically employed and children and grandchildren are given shares that have limited rights to income and redemption.
This new individual allowance was phased in from the 2017/2018 tax year, and is available where residential property belonging to and resided in by the deceased is left in their will to direct decendants. The allowance started at GBP 100,000 and has been increased to GBP 175,000 in the 2020/2021 tax year. The value of the allowance will be the lower of the nil rate band or net value of the property, and may only apply to one property. The allowance can be transferred between spouses if unused. If the net value of the estate is above GBP 2 million, the additional nil rate band is tapered away by GBP 1 for every GBP 2 of excess.