Your clients could be starting to think about how to support their loved ones, especially when they’re no longer around. Some may want to offer financial assistance to those family members suffering financial hardship, or to help the next generation get on the property ladder. And others could want to make gifts for the benefit of their minor children, or grandchildren, with any additional savings.
Whatever their circumstances, your clients will need your help to make the right decision – and be better prepared for whatever eventualities they or their family members might face. Here are some practical ways your clients could support their loved ones.
This information is based on our understanding of current taxation law and HMRC practice, which may change. The value of any tax relief or benefits will depend on your client’s individual circumstances.
1. Put a will in place
One of the first things your clients should consider doing is putting a will in place.
If they already have an existing will, consider encouraging your client to review this. Making sure it’s still valid and reflects their current wishes, especially if their family circumstances have recently changed.
If they don’t have a will in place, then on their death, the intestacy rules apply. As a result, their estate might not pass to their intended beneficiaries. For example, common law spouses don’t have any rights under the intestacy rules.
2. Review death benefit nominations
Pension and (or) life insurance death benefit nominations might not be on your client’s mind, but they should consider reviewing these to make sure they’re still up to date and reflect their current wishes.
3. Consider a personal protection or whole of life policy
A personal protection policy or whole of life policy in trust could provide a legacy for the benefit of a surviving spouse, children and/or grandchildren.
The policy could pay out a lump sum on the death of the insured person – or it could be a family income benefit policy – paying an ‘income’ for the remainder of the term of the policy. The regular ‘income’ payments, being capital in nature, would not be subject to income tax. So, you might want to make sure your client is aware of these policies and the implications.
4. Give gifts to support family members
Making a provision for gifts is a good conversation to have with your clients – older family members might want to offer support to the younger generation, to those who have lost their job or are struggling to make ends meet.
These gifts could be covered by one of the following inheritance tax (IHT) exemptions:
- £250 small gifts exemption.
- £3,000 annual IHT exemption – if it’s not fully used in one year, the remaining allowance can be carried forward for one year only.
- Normal expenditure out of income exemption – where the intention is to make regular gifts.
A larger gift from one individual to another will be a potentially exempt transfer to the extent it’s not covered by an IHT exemption. A gift intervivos policy could be put in place to cover the potential IHT liability should the donor die within 7 years of making the gift.
If the donor(s) wants to make a substantial gift, they may prefer to create a discretionary trust, as this would allow the trustees to exercise control over when a beneficiary(ies) can access the trust fund and to what extent. The gift to create the discretionary trust will be a chargeable lifetime transfer and the trustees will have to consider the ongoing implications of IHT 10 year charges and exit charges.
5. Consider gift options for minor children
Let’s compare two popular solutions, where gifts are being made to minor children, namely a stocks and shares JISA and a gift to a bare trust.
A Stocks and Shares JISA
A family member could pay up to £9,000 in this current tax year 2024/25 into a JISA for a child. This gift will be a potentially exempt transfer, to the extent it isn’t covered by the £3,000 annual exemption.
There will be no personal income tax or capital gains tax implications for the child. Using a JISA allows an element of control to be retained, as the child won’t be able to take withdrawals from the account until they are 18.
Bare Trust
A family member could consider setting up a bare trust for a minor child or children. The beneficiary(ies) and their entitlement under the trust will be set in stone at outset, so if a new child/grandchild were to be born, the donor would have to consider setting up a further bare trust for them.
The gift to create the trust will be a potentially exempt transfer, to the extent it’s not covered by an exemption such as the £3,000 annual IHT exemption. Unlike a JISA, there is no limit to the amount that the donor can gift into a bare trust.
Trustees can generally make payments to the parent or guardian for the benefit, education or maintenance of the beneficiary – whilst they’re a minor. The beneficiary becomes entitled to the trust assets at age 18 (or 16 in Scotland).
Net realised capital gains are assessed on the beneficiary, whether the trust is created by a parent or another family member – so the beneficiary may be able to offset their annual exemption £3,000 in tax year 2024/25. As the beneficiary is beneficially entitled to their share of the trust assets – there won’t be a disposal for capital gains tax (CGT) purposes if the trustees transfer the trust assets to the legal ownership of the beneficiary when they reach 18.
The trust income is taxed at the marginal rate of the beneficiary (and may be covered by their personal allowance, zero percent savings rate, personal savings allowance and/or dividend tax free allowance). If a parent creates a bare trust for their minor child, if the trust income generated is greater than £100 per child – then the income tax liability will fall on the parent. This £100 limit applies to each parent if both parents settle money into the bare trust.
Planning ahead for the future
These are several areas to consider discussing with your clients to help them better prepare for any circumstance they face and to help them make provision for the younger generation. Even though some of these conversations can be sensitive – it’s finding out what’s right for your client, whilst making sure they’re fully aware of the implications of their decisions that’s important.