Protecting a child's inheritance
Discussion
With all the current talk of upheaval in tax and inheritance rules, I think I need to do something to ensure that my daughter's inheritance is protected as best as it can be.
Revealing my complete lack of knowledge on the topic; I don't even know where to begin with exploring things like trusts, and other financial planning. Who would I speak to? An accountant? Solicitor? Other professional?
For context:
We are 40ish, our daughter is 4, so I'm hoping it isn't something that will come about for many years but... Life has a way of being crap.
We aren't wealthy finance gurus, but we're doing OK. We've taken a low risk approach, and by virtue of decent salaries and being quite frugal we now have some properties with mortgages paid off. We are considering two options for the near-term:
1) sell at least two houses, and buy one bigger property, possibly with a small mortgage on top
2) keep all the houses and buy one bigger property, definitely with a mortgage.
We'd also like to retire as early as possible; realistically this won't be until my daughter finishes university, so 60-65. Our pensions are on-track to achieve this.
My long-term goal is to set my daughter up for a life free of financial worry. Obviously we want her to establish herself in a career she loves, hopefully that will pay the bills. However that is always going to be easier when she doesn't have the stress of keeping a roof over her head. I don't want her to end up in a situation where she doesn't have the option of keeping the family house because the government wants it all. In short, I don't want her inheritance (the fruits of our toil) being destroyed in order to fund government mismanagement or prop up others who didn't take a prudent approach to life.
Revealing my complete lack of knowledge on the topic; I don't even know where to begin with exploring things like trusts, and other financial planning. Who would I speak to? An accountant? Solicitor? Other professional?
For context:
We are 40ish, our daughter is 4, so I'm hoping it isn't something that will come about for many years but... Life has a way of being crap.
We aren't wealthy finance gurus, but we're doing OK. We've taken a low risk approach, and by virtue of decent salaries and being quite frugal we now have some properties with mortgages paid off. We are considering two options for the near-term:
1) sell at least two houses, and buy one bigger property, possibly with a small mortgage on top
2) keep all the houses and buy one bigger property, definitely with a mortgage.
We'd also like to retire as early as possible; realistically this won't be until my daughter finishes university, so 60-65. Our pensions are on-track to achieve this.
My long-term goal is to set my daughter up for a life free of financial worry. Obviously we want her to establish herself in a career she loves, hopefully that will pay the bills. However that is always going to be easier when she doesn't have the stress of keeping a roof over her head. I don't want her to end up in a situation where she doesn't have the option of keeping the family house because the government wants it all. In short, I don't want her inheritance (the fruits of our toil) being destroyed in order to fund government mismanagement or prop up others who didn't take a prudent approach to life.
A common enough problem but a lot of factors involved not least of which is knowing how long you are both going to live for , how much money you two will require and of course whether long term care costs might also need to be thought of.
Your daughter is also very young and there will be a lot of other “ natural “ costs along the way until she is 18 and then Uni etc ?
In truth I don’t think you ever stop contributing !
There is also the other factor that would you be wanting or able to give her “ early inheritance “in terms of house deposit or indeed a larger percentage.
Trying to gauge what future Governments will do in terms of impacting your wealth is also impossible.
Buying a joint life second death policy to offset potential IHT at your age is naturally somewhat cheaper than say when I looked at this aspect a few years ago when I was 62 or so.
What I did do instead was to give my 3 children 100% of my TFLS from my transferred pension and also do a DOV from a recent inheritance.
That has allowed 2 to buy houses with only modest mortgages and an immediate 50% or so equity stake and the third is looking but his circumstances mean probably 100% equity will be needed.
It’s also about a balance and not wanting to take away ambition and drive from them.
Certainly without BOMAD it’s tough for youngsters today.
Your daughter is also very young and there will be a lot of other “ natural “ costs along the way until she is 18 and then Uni etc ?
In truth I don’t think you ever stop contributing !
There is also the other factor that would you be wanting or able to give her “ early inheritance “in terms of house deposit or indeed a larger percentage.
Trying to gauge what future Governments will do in terms of impacting your wealth is also impossible.
Buying a joint life second death policy to offset potential IHT at your age is naturally somewhat cheaper than say when I looked at this aspect a few years ago when I was 62 or so.
What I did do instead was to give my 3 children 100% of my TFLS from my transferred pension and also do a DOV from a recent inheritance.
That has allowed 2 to buy houses with only modest mortgages and an immediate 50% or so equity stake and the third is looking but his circumstances mean probably 100% equity will be needed.
It’s also about a balance and not wanting to take away ambition and drive from them.
Certainly without BOMAD it’s tough for youngsters today.
My son is 6 so thinking along similar lines. My personal view is to make use of all tax shelters that exist in our names and in his (JISA/SIPP etc) and see how the world looks a lot closer to the time.
If you re utilising all of the shelters that exist you will almost certainly put yourself in the best possible spot to make a decision when that time comes. Property I don t think is the best shout these days but ymmv there.
You also don t know where your child will be at, they could require you to buy them a house completely, or your contribution may be of limited relevance if they land a job in a top career. These things can and do change rapidly.
If you re utilising all of the shelters that exist you will almost certainly put yourself in the best possible spot to make a decision when that time comes. Property I don t think is the best shout these days but ymmv there.
You also don t know where your child will be at, they could require you to buy them a house completely, or your contribution may be of limited relevance if they land a job in a top career. These things can and do change rapidly.
I don’t have much to add other than that I agree with okgo’s comment about not thinking that property is a good way to protect your daughter’s inheritance. One of your options involved potentially buying a larger property; I think that larger / more expensive properties will reduce in value in real terms over the coming years.
I think property has had its day in many areas.
14 years ago my folks downsized to a 2 bed flat which they bought for 105k. Now they are deceased and the flat is currently SSTC for 117k so taking inflation into account its value has decreased. My wife rents her old place out. That has probably kept pace with inflation but no more than that.
Our son is 10. We are not really wealthy enough to consider trusts and the like. He has a JISA which has around 40k currently. That will increase a bit over the next 8 years and will have to do him really. It's possible we might be able to help him out more if necessary but it's too early to say. For now we just keep working and saving.
14 years ago my folks downsized to a 2 bed flat which they bought for 105k. Now they are deceased and the flat is currently SSTC for 117k so taking inflation into account its value has decreased. My wife rents her old place out. That has probably kept pace with inflation but no more than that.
Our son is 10. We are not really wealthy enough to consider trusts and the like. He has a JISA which has around 40k currently. That will increase a bit over the next 8 years and will have to do him really. It's possible we might be able to help him out more if necessary but it's too early to say. For now we just keep working and saving.
Sorry, I was a little unclear about the property aspect; we want to move to a bigger property anyway. My concern about it is that she may want to continue living there after we're gone, then find she can't afford to because of a tax on the deceased.
Some of the properties we're looking at have outbuildings that could potentially be converted or replaced (STPP) so a nice-to-have is that we could build a retirement dwelling, handing the main house over to her and staying nearby. So I don't know how a "living inheritance" works, if at all.
Of course, she might not need/want to live there when the time comes. But I want her to have the option of doing what she likes with her childhood home whilst minimising the financial burden on her.
As you might be able to tell, I'm really no financial whizz but I'm not afraid of a project. However, knowing my limitations I need to pay someone to advise me. I simply don't know what that someone would be though!
Some of the properties we're looking at have outbuildings that could potentially be converted or replaced (STPP) so a nice-to-have is that we could build a retirement dwelling, handing the main house over to her and staying nearby. So I don't know how a "living inheritance" works, if at all.
Of course, she might not need/want to live there when the time comes. But I want her to have the option of doing what she likes with her childhood home whilst minimising the financial burden on her.
As you might be able to tell, I'm really no financial whizz but I'm not afraid of a project. However, knowing my limitations I need to pay someone to advise me. I simply don't know what that someone would be though!
I reckon most of us overthink this kind of thing.
You could get some advice from an IFA but they can only help you with what to do now rather than many years in the future. If you want to move to a bigger property in your 40s I'd just do it and not worry about your daughters inheritance just yet. See where you are when she us grown up. That's my plan. I'm 54 and plan to keep working as is for the next decade. Depending on how things go with investments, health and the like ill probably get some advice at that point. Our son will be 20 and his path should be a little clearer.
You could get some advice from an IFA but they can only help you with what to do now rather than many years in the future. If you want to move to a bigger property in your 40s I'd just do it and not worry about your daughters inheritance just yet. See where you are when she us grown up. That's my plan. I'm 54 and plan to keep working as is for the next decade. Depending on how things go with investments, health and the like ill probably get some advice at that point. Our son will be 20 and his path should be a little clearer.
ChrisH72 said:
I reckon most of us overthink this kind of thing.
You could get some advice from an IFA but they can only help you with what to do now rather than many years in the future. If you want to move to a bigger property in your 40s I'd just do it and not worry about your daughters inheritance just yet. See where you are when she us grown up. That's my plan. I'm 54 and plan to keep working as is for the next decade. Depending on how things go with investments, health and the like ill probably get some advice at that point. Our son will be 20 and his path should be a little clearer.
I largely agree with this but if some of the properties you're looking at have potential for an annex in an outbuilding that would definitely be a consideration for me when looking at properties.You could get some advice from an IFA but they can only help you with what to do now rather than many years in the future. If you want to move to a bigger property in your 40s I'd just do it and not worry about your daughters inheritance just yet. See where you are when she us grown up. That's my plan. I'm 54 and plan to keep working as is for the next decade. Depending on how things go with investments, health and the like ill probably get some advice at that point. Our son will be 20 and his path should be a little clearer.
Transfer the wealth now and over the next 15+ years.
Setup a Junior S&S ISA £9k per year into until she is 18
Setup a Junior SIPP £2880 per year in (+720 gov topup) for 7 or 8 years and then let compounding do its work. Could be worth ~£1-2m at retirement age also providing for your grandkids, however pension rules are changing and will be included in IHT calculations.
Premium bonds £50k max.
When the time comes and she is 18, sell one of your houses, gift her the cash and let her buy her own home.
That a whopper of a setup for an 18 year old kid and slightly risky as you will have zero control of the ISA once 18years old.
Setup a Junior S&S ISA £9k per year into until she is 18
Setup a Junior SIPP £2880 per year in (+720 gov topup) for 7 or 8 years and then let compounding do its work. Could be worth ~£1-2m at retirement age also providing for your grandkids, however pension rules are changing and will be included in IHT calculations.
Premium bonds £50k max.
When the time comes and she is 18, sell one of your houses, gift her the cash and let her buy her own home.
That a whopper of a setup for an 18 year old kid and slightly risky as you will have zero control of the ISA once 18years old.
Beware Premium Bonds. The money is likely to shrink with a return lower than inflation and the tax free status may be worthless to a child..
Yes, to pension.
Yes, to ISA.
And now the practicalities. Hargreaves Lansdown (or others) will be able to organise a suitable account for the child, indirectly. Fairly obviously somebody else needs to be operating the account.
The tax situation. For practical puposes EVERY form of trust, however small, needs to be registered with HMRC these days, even a so-called "bare trust". This is a different system than filing tax returns although the two run in parallel. An annual update of the registration is required.
https://www.gov.uk/trusts-taxes/registering-a-trus...
If you decide to go with some form of full-tilt trust you may find both the trust and the child need to file annual tax returns.
IMO any significant trust activity should only be considered with professional input from a suitably experienced solicitor or other adviser, probably in the context of an overall review of IHT planning, so your Wills under consideration at the same time.
Yes, to pension.
Yes, to ISA.
And now the practicalities. Hargreaves Lansdown (or others) will be able to organise a suitable account for the child, indirectly. Fairly obviously somebody else needs to be operating the account.
The tax situation. For practical puposes EVERY form of trust, however small, needs to be registered with HMRC these days, even a so-called "bare trust". This is a different system than filing tax returns although the two run in parallel. An annual update of the registration is required.
https://www.gov.uk/trusts-taxes/registering-a-trus...
If you decide to go with some form of full-tilt trust you may find both the trust and the child need to file annual tax returns.
IMO any significant trust activity should only be considered with professional input from a suitably experienced solicitor or other adviser, probably in the context of an overall review of IHT planning, so your Wills under consideration at the same time.
md_ph said:
Transfer the wealth now and over the next 15+ years.
Setup a Junior S&S ISA £9k per year into until she is 18
Setup a Junior SIPP £2880 per year in (+720 gov topup) for 7 or 8 years and then let compounding do its work. Could be worth ~£1-2m at retirement age also providing for your grandkids, however pension rules are changing and will be included in IHT calculations.
Premium bonds £50k max.
When the time comes and she is 18, sell one of your houses, gift her the cash and let her buy her own home.
That a whopper of a setup for an 18 year old kid and slightly risky as you will have zero control of the ISA once 18years old.
I think that is decent advice. The Junior ISA will roll over automatically into an adult ISA at 18, and you could maybe hold off buying a house until she is 25-30 perhaps, finished college and settled in a particular location for work. And proven she hasn't frittered the ISA pot away by that point. Setup a Junior S&S ISA £9k per year into until she is 18
Setup a Junior SIPP £2880 per year in (+720 gov topup) for 7 or 8 years and then let compounding do its work. Could be worth ~£1-2m at retirement age also providing for your grandkids, however pension rules are changing and will be included in IHT calculations.
Premium bonds £50k max.
When the time comes and she is 18, sell one of your houses, gift her the cash and let her buy her own home.
That a whopper of a setup for an 18 year old kid and slightly risky as you will have zero control of the ISA once 18years old.
I kind of agree with the sentiment that you could enable her to pursue a meaningful career or vocation without being forced to chase £s doing something soul destroying for decades just to able to afford a home.
At the same time I'm wary given I know people who were under the impression at a fairly young age they would be come into a significant windfall one day - be millionaires even - and they wasted their entire lives and ended up as permanent teenagers because they never had to get their sh*t together.
And in the end the windfall either never came, came too late, was stolen by a partner, or wasn't enough by itself to make up for a car crash of a life.
Quite pathetic to see it happen and someone waste their potential.
To add: If you have parents, there may be some advantage if a trust is set up by grand-parents rather than parents. Grandparents do not face the same tax anti-avoidance rules that parents do when gifting money to minor children. Under these rules a child's income may be taxed as income of the parent. Seek professional guidance.
I'd be interested to know if anyone here had parents who set them up in this kind of way? I'm inclined to think it's a relatively recent concept. I don't know of anyone who benefited from this sort of early inheritance at the age of 18. There is a very high risk of killing any incentive to do well in life if its all handed to them on a plate.
Just curious.
Just curious.
Oh I get that too. I don't want her to grow up unable to look after herself, or the target of a gold digger.
One of my best mates has inherited millions, and always knew he would. However, his parents raised him well, instilled a good work ethic and he's always stayed pretty grounded. He enjoyed the expensive toys and holidays as a kid, and having multiple homes bought for him as an adult but he's always made it clear to us that he didn't earn those things.
He's always worked hard, but having a great deal of financial stability has also allowed him to take risks that have paid off. TBH I'm surprised he hasn't retired! But, that's the life I want to offer my girl.
One of my best mates has inherited millions, and always knew he would. However, his parents raised him well, instilled a good work ethic and he's always stayed pretty grounded. He enjoyed the expensive toys and holidays as a kid, and having multiple homes bought for him as an adult but he's always made it clear to us that he didn't earn those things.
He's always worked hard, but having a great deal of financial stability has also allowed him to take risks that have paid off. TBH I'm surprised he hasn't retired! But, that's the life I want to offer my girl.
alscar said:
It's also about a balance and not wanting to take away ambition and drive from them.
^This. Welcome to the world of forward planning how to offload the dough you won't spend - nobody ever does!There's a lot of variables in play and I initially looked at gifting money now but was cautioned by the above quote, at present I've given money for the house deposit, funded some early cars and paid a decent chunk to the wedding.
I like the idea of a property with an outbuilding/annex for parents to live in but not sure how my daughter and new husband would welcome that idea even if I gave them the money to buy it and hopefully surviving 7+ years but then question whether HMRC would see it as a gift with reservation? That said my daughter loves the south west so me giving her the money to buy a holiday home may be an option.
I'm surprised you want a bigger place as we're looking to eventually down size and will likely buy also a place abroad and do 90 in 180 on rotation, despite being patriotic I've lost it with this country's direction.
Trusts I've no idea, so others will advise but I think it requires you to consolidate all your investment assets pulling them out of various tax free wrappers and putting them into some sort of fund? How it gets around IHT and how much they cost I don't know.
I think time is on your side so I'd make use of all tax wrappers available for your daughter so use them along with some specialist advice.
I know as it stands when one of us dies there's a large IHT liability that needs thinking about despite being your average Joe. When you don't spend it it adds up
WayOutWest said:
md_ph said:
Transfer the wealth now and over the next 15+ years.
Setup a Junior S&S ISA £9k per year into until she is 18
Setup a Junior SIPP £2880 per year in (+720 gov topup) for 7 or 8 years and then let compounding do its work. Could be worth ~£1-2m at retirement age also providing for your grandkids, however pension rules are changing and will be included in IHT calculations.
Premium bonds £50k max.
When the time comes and she is 18, sell one of your houses, gift her the cash and let her buy her own home.
That a whopper of a setup for an 18 year old kid and slightly risky as you will have zero control of the ISA once 18years old.
I think that is decent advice. The Junior ISA will roll over automatically into an adult ISA at 18, and you could maybe hold off buying a house until she is 25-30 perhaps, finished college and settled in a particular location for work. And proven she hasn't frittered the ISA pot away by that point. Setup a Junior S&S ISA £9k per year into until she is 18
Setup a Junior SIPP £2880 per year in (+720 gov topup) for 7 or 8 years and then let compounding do its work. Could be worth ~£1-2m at retirement age also providing for your grandkids, however pension rules are changing and will be included in IHT calculations.
Premium bonds £50k max.
When the time comes and she is 18, sell one of your houses, gift her the cash and let her buy her own home.
That a whopper of a setup for an 18 year old kid and slightly risky as you will have zero control of the ISA once 18years old.
I kind of agree with the sentiment that you could enable her to pursue a meaningful career or vocation without being forced to chase £s doing something soul destroying for decades just to able to afford a home.
At the same time I'm wary given I know people who were under the impression at a fairly young age they would be come into a significant windfall one day - be millionaires even - and they wasted their entire lives and ended up as permanent teenagers because they never had to get their sh*t together.
And in the end the windfall either never came, came too late, was stolen by a partner, or wasn't enough by itself to make up for a car crash of a life.
Quite pathetic to see it happen and someone waste their potential.
You can also take out a life insurance policy now that will cover the IHT due on any inheritance you leave your daughter - maybe something to think about instead of giving her so much cash too early.
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