Leave your wealth in the right hands and avoid unnecessary Inheritance Tax

After the hard work you have put in to generating wealth in the first place, you will of course want it to remain in good hands. Avoid “Double Trouble” tax problems and consider solutions with tax perks instead… 

Trouble 1 – Income tax on Savings income

Squirreling away pennies and pounds into a savings account for your children until they reach the ripe old age of 18 and can (apparently!) manage money themselves, is all very well, but it can have implications for tax purposes; interest on savings that exceeds £100 a year (per child) is actually considered to be YOUR income and will be taxed as income tax on your personal tax return.

Trouble 2 – Inheritance tax on gifting money

Transferring sums to your children that exceed £3,000 per year can work but it can be liable for up to 40% Inheritance Tax if you were to die within 7 years from the transfer. It is important to note that the £3,000 is your “annual IHT exemption” not an annual allowance per child, so it very much depends on the size of your family as to how the calculations on this pan out.

Solution 1 – overcoming IHT

There is a silver lining though; some gifts can be removed from association with your estate as soon as the transfer is made. It involves making regular transfers from what is considered your “unused income”. By making the “gift/s out of income” transactions regularly, it demonstrates that giving up the funds doesn’t have an impact on your typical standard of living.

The £3k annual IHT exemption can then be combined with a “gifts out of income” strategy so you can provide funds for your children without falling into the IHT bracket. Good news!

Solution 2 – overcoming Income Tax 

It gets better! By parents investing in a pension plan for their children, something they are able to do from the birth of the child, has an interesting additional tax perk.

There is a maximum of £2,880 per year per child that can be invested into a registered pension. Depending on the number of children you have, all or some of this would be covered by the IHT annual exemption (£3k per parent per year) and the rest though the regular payments considered as “gifts out of income”, if spare income is actually available, of course.

The added bonus here is that for every £80 invested into a pension fund for your children. The government contribute an additional £20, so boosting the pension fund and without affecting the IHT position annnnnd with no income tax implications. Bringing it back full circle the £100 limit for income tax becomes irrelevant.

This may need distilling and putting into context to your own situation, so please contact us to talk things through.