| LUMP SUM INVESTMENTS
For those looking to make lump sum provisions, the solutions offer very similar benefits to regular savings, but depending on the circumstances, planning can be slightly more complex (fear not, I’m keeping this very brief!).
Most lump sum gifts or transfers over the £3,000 annual gift exemption will be subject to the 7 year rule (see below). This rule has a bearing on almost all lump sum investments for children:
1. Outright gifts
If your beneficiaries are already at an age where they need the money and you trust them use it wisely, keep it simple and gift the money to them outright.
In simple terms, live 7 years and the excess gift over £3,000 is outside of your estate. If death occurs between years 3 and 7 following the gift, then taper relief – where it applies – will reduce any IHT payable.
Outright gifts don’t require any legal administration. However, it’s worth making a note of the transaction somewhere in your financial files, as it will help your executors identify and calculate the IHT impact of any gifts.
2. Trust Investments
Many are familiar with the idea of trusts but it’s worth revisiting their potential uses and benefits:
Control – a trust allows you to retain control over who benefits from the trust fund, when they can benefit and how the lump sum is invested.
Tax – generally trust investments are treated in the same way as outright gifts. Therefore, provided you live the 7 years following inception of the trust, the fund and any growth achieved will be outside of your estate for IHT purposes (taper relief may also be available).
Income – certain trusts allow you to draw an income from the fund and others even allow access to the capital itself.
Administration – like any important financial arrangement, trusts require some ongoing management, but the perceived work and complexity is often grossly over-stated.
In fact, some of this work can be reduced quite easily if you set things up in the right way. For example, if the trust fund invests in vehicles such as Investment Bonds (also known as a life assurance bond
), the trustees aren’t required to submit an annual tax return, which saves you both time and cost.
If you haven’t done any prior planning and simply give your beneficiaries money towards a deposit for a home, this is treated as an outright gift.
For those wanting to get in on some early property action, you could consider purchasing a rental property for your beneficiaries while they’re young.
This could mean buying an investment property outright in your own name and later transferring ownership to the beneficiaries when you feel the time is right.
Alternatively, you could purchase the property via a trust, so that you can retain more control over the asset.
Either way, there can be a complex web of considerations here (capital gains, income tax, stamp duty and gifting rules), so taking legal and even tax advice is imperative.
It’s probably also worth noting that property is an increasingly more expensive and tax inefficient asset to own, particularly within a trust structure.