Wealth – how to get it, grow it, and keep it in the family
From university fees to care homes and to buying property, families are stepping in like never before to beat the tax man and help their relatives. Here's what you need to know to join them.
Money. It’s not a subject many of us feel comfortable talking about, is it? With friends we tend to skirt around salaries, how many years are left on mortgages, or who’s quietly helping out with school fees, because it’s all just a bit, you know, awkward.
But when it comes to family discussions on finances, well – we’re talking about a whole new level of trickiness. Inevitably money matters are tangled up in our life choices (good and bad) our dreams, desires and difficulties, and strong emotions are never far from the surface. Yet there’s never been a more important time to talk about finances within the family.
Millennials are the first generation in over 100 years to be less well-off than their parents, according to 2017 figures from Business Insider. At the other end of the scale, according to data from 2016 from SAGA, those in their Sixties have never felt more flush, with many having benefitted from the rise in property prices, and an average total household wealth of £83,105. In the middle of these extremes are the ‘squeezed’ parents wanting to help their children get on the property ladder or contribute to university fees, but also wondering how the hell they’ll afford care home fees in the future for their own parents.
If we can shake off the squeamishness, talking honestly about money can be positive and could have the ability to be transformational for everyone involved. Certainly ‘family wealth transfer’ (the movement of money between generations) is something more of us will experience with the Kings Court Trust estimating it will account for a cool £5.5trillion in the UK between now and 2055.
So if you’re been thinking about how you could potentially support members of your family (or how to ask for help yourself) we have the answers. Well, actually, no we don’t, but we’ve asked Jo Perry Taylor from Schroders Personal Wealth to help us out. Over to you Jo.
1. HOW CAN I ‘PAY FORWARD’ MY SAVINGS TO MY FAMILY SO IT DOESN’T ALL GO TO THE TAXMAN?
This is one the most asked questions – no one wants to hand over their money to HMRC when they could help their families! Inheritance Tax (IHT) is an extremely complicated area, everything you leave to a spouse or civil partner is free of IHT as is anything you leave to a charity or amateur sports club.
Everyone can leave £325,000 to someone other than their legal partner free of IHT, this is what is called a nil rate band, this only rises to £500,000 if you are leaving your main home to children. Anything above this nil rate band may incur IHT. London and the South East, where property prices are amongst the highest, account for 48 per cent of IHT charged across the UK, according to Telegraph figures from 2017.
One thing you could look to do is to gift assets while you’re still alive, but you need to live for seven years after making any gift, otherwise IHT may still be due. To mitigate the risk of you dying before the seven years expires and depending on your individual circumstances, you could take out a seven-year decreasing life insurance policy to match the IHT liability of your gift(s) – this could be a relatively cost effective way of making sure your loved ones receive as much of your estate/gift as possible.
The good news is that there are exemptions to this ‘seven year’ rule that work in the favour of families and can be used for everything from weddings to school fees including:
- You can give someone (a family member or anyone) up to £3,000 per year without any inheritance tax liability
- If you don’t use your £3,000 allowance (as above) it can be carried onto the following year – but only one year
- Using both allowances over two years, a married couple could cash gift up to £12,000 to someone without incurring IHT liabilities
- Weddings are special – each parent can give their child £5,000 as a wedding gift without any inheritance tax liability
- Grand and great-grand parents can also each give the couple up to £2,500 as a wedding gift without any inheritance tax implications
- Other relatives/friends can gift up to £1,000 tax free
- You can gift regularly from ‘surplus’ income – for example, a sum every birthday, You need to be able to show that this has come from your income that wasn’t needed for everyday living expenses. If you haven’t had to deprive yourself to make the payment or dip into savings/capital.
- If a child is under 18 and you’re looking to put some money aside for their future you could consider a JISA – this will need to be set up by the parent/guardian in the child’s name. The annual savings limit for 2020/21 is £9,000 per child and is tax free. Once the child reaches 18 the JISA will be transformed into a standard adult ISA in the individual’s name.
2. PROPERTY-WISE, HOW CAN I BEST HELP MY FAMILY?
Following reforms announced by George Osborne in 2015, it’s possible for deceased parents to pass on a home worth up to £1m (£500,000 each) to their children tax-free– this is known as the residence nil rate band. This obviously requires your death which isn’t ideal! If you want to help buy a property for your children or grandchildren now, there are ways you could help with both the mortgage agreement and deposit. You could consider gifting all or part of the deposit (see gifting rules above!) or if your vision is more long term you could pay money into an ISA, JISA or LISA with the aim of making it easier for them when the time comes. You could also help with the mortgage monthly payments under the ‘surplus income’ rules above.
What else? It’s possible to help out as a guarantor to ease the wheels to their own mortgage being accepted (you’ll generally need to own your own home and enough income to meet repayments should they default on payments), but take care here as in the worst-case scenario you could lose your own home. You can also place a sum of money on deposit as part of this family scheme. Or how about taking out a joint mortgage? The assessment will be based on your joint incomes, your home equity and your ability to repay the mortgage if required as well as other lending criteria. Be aware though that they come with string of conditions (especially if this is a second mortgage) and you could also be liable for stamp duty surcharge if this is not your main property, and for capital gains tax when the property is sold.
3. HOW ON EARTH WILL WE PAY CARE HOME COSTS FOR OUR PARENTS?
Around 2.6m adults are now caring for their parents, with an astonishing 2m of these carers aged between 60 and 64 (Carehomes: Where are we now? Grant Thornton 2018), and as more of us can expect to live longer the need for care will inevitably rise further.
At £33,000 per year, the average cost of a residential care in the UK is daunting, and if your parents require additional nursing care for example if they have Alzheimer’s or dementia, you can add a further £10,000-£20,000 to that figure – truly scary sums of money for all but the very wealthy. First stop should be the local authority or the NHS which may help out depending on your parents’ needs, where they live and their income/capital (including their house) so explore this fully before you dip into your own pockets. (Care home costs & care home fees in the UK, UK Care Guide, Feb 2021).
Older generations could consider a long-term care plan to take the financial burden off their children– this is a specific type of annuity and you’ll need to talk to a professional. Basically, in return for a lump-sum amount, the insurer makes monthly payments direct to the care home rather than to your parent. This makes them free of income tax so could be a tax-efficient way to top up care home fees if your parent’s income isn’t enough. Be aware though that if your parent’s condition means the NHS funds the cost of care, then the annuity is paid to your parent, and becomes taxable as any other form of income. As with any annuity contract, the total payments you receive might be less than the amount paid if your parent dies sooner than expected.
4. WHAT SHOULD I WRITE INTO MY WILL TO HELP PROTECT MY FAMILY?
Talking with family about wills is hard, but it’s really important so that families understand what’s been prepared in advance, and the person creating the will is in control of what happens to their wealth when they’re gone and there’s no soap-opera style feuds launched on the day the will is read. Dying intestate (without a will ) can be really hard on family members, creating unnecessary stress, pressure and tensions. Having a will in place is especially important for those who own a property; are divorced and remarried; are separated but not divorced; living with a partner but not married; or not married and without children but wanting particular individuals or charities to benefit from their wealth.
Ask yourself these questions.
- Do your parents have a will and power of attorney?
- Do you know where these are if you need to find them?
- Do you know how your parents would feel if they ever had to sell the family home?
- Do you know your parents’ opinions on receiving outside help e.g. community care?
- Do you know your parents’ opinions about going into a care home?
If the answer to any of these is no, it’s a good idea to start talking! And don’t forget to have these conversations with your own children too – you’ll save them going through the same process 30 years down the line.
Fees and charges may apply. All the scenarios discussed above are just examples and what is right for each person will depend on individual circumstances. Tax treatment also depends on individual circumstances and may be subject to change in the future.