Ingenious ways to pass on your wealth inheritance tax-free – without turning

Many families would far rather pass wealth to the next generation than have it seized by the taxman but are wary of giving children and grandchildren too easy a ride.

It’s a classic conundrum. How do you give away your hard-earned money without undermining the values of hard work and financial responsibility you hope to instil in your offspring?

But the pending inheritance tax levy on unspent pensions, and the threat of a further tax raid in this autumn’s Budget, has prompted many families to consider how to reduce the bill without further delay.

Spending or gifting your money are the easiest ways to avoid inheritance tax legally.

The first is straightforward enough. But wealth planners tell us that while many people are weighing up how best to gift money to younger family members, they have worries about the effect this may have. This can in some cases be down to a lack of trust that they won’t just fritter it away.

However, it is also about ensuring that your loved ones get a good start in life without taking their good fortune for granted or failing to learn how to manage their own finances sensibly.

‘How to strike the right balance between tax-efficient estate planning without demotivating the next generation is a recurring issue among our clients,’ says Olly Cheng, financial planning director at Rathbones.

‘Many of them have a story about an acquaintance where the parents were a bit too generous, and as a result their children never had the drive to make the most of their careers.’

With pensions being caught in the inheritance tax net from April 2027, making plans to reduce the bill is becoming more urgent, according to Zohaib Mir, a financial planner at EQ Investors.

‘The so-called Bank of Mum and Dad remains open, but parents are increasingly thoughtful about how support is provided,’ he says.

‘Support can empower ambition – it doesn’t have to dilute it.’

Some gifts, such as help to buy a home, can intensify the need to keep working hard rather than detract from it, agrees Anthony Fuller, a chartered financial planner at Path Financial.

He points out a large money gift or inheritance can give someone the freedom to change jobs or even their careers. Suddenly, a more enjoyable but less well-paid job may be affordable.

‘Examples I have come across are clients who have given up their full-time jobs to work for a charity on less money, set up their own business or retrained because they have become unhappy in their previous career,’ he says. So, if you think there is cause for concern about how your wealth will be spent or want to ensure it has a positive impact, how do you retain control or simply put your money towards worthwhile goals? Here are the experts’ smartest tips.

SHOW THEM HOW IT’S DONE WITH A JUNIOR ISA 

Investing alongside your children, whether they are under 18 or adults, can give them a good start in life, stop them just spending the money you hand over, and teach them valuable lessons.

You can put up to £9,000 a year in a Junior Isa for a child, who can start managing the account when they are 16 but cannot make a withdrawal until they are 18.

This offers a great opportunity to teach children about investing, and to get them involved in an age-appropriate way.

You can ‘consult’ them on buying and selling decisions, and, as they grow up, switch roles, so you become the ‘consultant’.

You can put up to £9,000 a year in a Junior Isa for a child, who can start managing the account when they are 16 but cannot make a withdrawal until they are 18

Over-18s run their own stocks and shares Isas, but you can still influence an adult child by agreeing to match whatever they put in, or invest alongside them.

You can also swap ideas about what you are putting in your own Isa and pursue parallel or contrasting investment strategies.

Mr Cheng says: ‘The most important thing is to start having money conversations with your children as early as possible.

‘It is never too soon to instil the value of long-term savings and to discuss what financial milestones any gifts are intended for.’

An increasing number of people are making gifts out of surplus income because they will be exempted from inheritance tax.

If you are doing this, your children’s and grandchildren’s Isas are one of several useful destinations for this cash.

Mr Mir says it will help reduce the size of an estate over time while encouraging financial engagement from the recipient.

‘In one case, a parent offered to top up their daughter’s Isa by £500 a month – on the condition she saved the same from her salary,’ he says. ‘It became a shared goal and a way to build investmentconfidence together.’

PUT MONEY TOWARDS PRIVATE SCHOOL FEES 

Wealthy grandparents may want to contribute or assume full…