Leaving a legacy behind for your children
Leaving a legacy can feel like an incredibly complicated subject, often because of family dynamics, financial education, and emotions. In this article, we explore some of the options that could help you leave a lasting legacy for your children.
7 minute read
What does leaving a legacy mean?
For most people, leaving a legacy means providing their loved ones with money, property or other assets after they have died. The best way to ensure your assets are given to your family and other beneficiaries is to make a will.
Making a will is essential because it means you get to decide what happens to your estate (all of your money, property and possessions) after you die. If you die without leaving a will, your estate will be placed ‘intestate’, which could mean your estate is not passed on according to your wishes. Having a legally certified will in place also means you can name someone to take charge of organising your estate after your death. This could include appointing legal guardians for your children, sorting out who gets your possessions, and any requests for your funeral. Once your will has been written, there’s nothing to stop you updating it from time to time, should your circumstances change. Additionally, writing a will can help make your financial affairs known to the taxman, potentially reducing the amount of Inheritance Tax that would otherwise be payable.
Understanding Inheritance Tax
Every year, thousands of families are left to face an unexpected Inheritance Tax bill.1 So it’s a good idea to be acquainted with some of the basic rules relating to Inheritance Tax, to know some of the tax allowances that are available, and also to identify some of the steps you can take while you’re alive to minimise the potential tax bill your family might be left with.
First, everyone in the UK benefits from an Inheritance Tax allowance known as the ‘nil-rate band’ of £325,000.1 This means that where the estate is valued at more than £325,000, the estate’s beneficiaries will be required to pay Inheritance Tax of up to 40% on everything above that threshold.1 However, if you leave all of your estate to your spouse or civil partner, there’s no Inheritance Tax for them to pay. Also, leaving the entire estate to a spouse or civil partner doesn’t use up the nil-rate band. So, when the surviving spouse or civil partner dies, their estate benefits from a double nil-rate band of £650,000 (£325,000 x 2) before any Inheritance Tax is payable.1
It’s therefore important that parents consider writing a will that explicitly leaves all of their estate to their surviving spouse or civil partner before that estate is then left to the children. This way, parents can make full use of their available nil-rate bands, and reduce the likelihood of leaving a large Inheritance Tax bill for their children to pay.
Leaving property to your children
There’s another important Inheritance Tax allowance you should factor into your legacy planning. Introduced in 2017, the Residence Nil-Rate Band (RNRB) is an additional allowance designed so that more people can leave their family home as part of their estate without an Inheritance Tax bill. The RNRB lets you claim a further allowance of £175,000 if your will states that you are leaving your home to a ‘direct descendent’ (children or grandchildren).2
The ultimate goal of these allowances is to make it possible to leave an estate valued at £1 million to children without triggering an Inheritance Tax bill. Here’s an example of how this works in practice:A husband dies and his will states that his entire estate (including the family home) should go to his wife. His wife has a will in place that states if she is the surviving spouse, she will leave the family home and the rest of her estate to their children. As a result, this means her estate can claim combined Inheritance Tax allowances of £1 million (two individual nil-rate band allowances of £650,000 plus two RNRB allowances of £350,000), leaving no Inheritance Tax to pay.3
Passing on investments It’s also important to think about any investments and pensions that you own, and to determine whether they will form part of your taxable estate. For example, people often think of Individual Savings Accounts (ISAs) as highly tax-efficient, but after you die, if you are planning to leave them to your children, grandchildren or other beneficiaries, they could be subject to Inheritance Tax.
Not to be confused with an investment trust, a bare trust is one of the most common forms of trust used to pass assets onto children as part of estate planning. With a bare trust, the assets are held in your name (as the trustee), although your child (the beneficiary) has the right to all of the capital and income within the bare trust. The trustee just looks after the assets until the beneficiary is old enough (18 in England and Wales, 16 in Scotland). In other words, you can place an investment trust into a bare trust and the investment itself would be fully exempt from Inheritance Tax provided the trustee lives for another seven years after the transfer is made.
Junior ISAs A Junior ISA works in a similar way to an adult ISA, including offering tax-free capital growth and interest, and is a great way to make a long-term investment on a child’s behalf. A Junior ISA must be opened and managed by the parent or guardian, but is held in the name of the child, meaning it is outside of the parents’ estate for Inheritance Tax purposes. The child can take control of the account when they are 16, but they are not able to access the investments (or make withdrawals) until they reach 18, at which point the JISA converts into an adult ISA. There are Cash JISA and Stocks & Shares JISA options to choose from, and parents, friends and family can make JISA contributions of up to £9,000 each tax year.
If you really want to leave a long-term legacy for your children, you can even set up a pension on their behalf and see their investments benefit from decades of growth. As the pension is held in the child’s name, any investment will not be part of the parents’ estate for Inheritance Tax purposes.
The maximum amount you can invest into a junior pension is £2,880 each tax year, but the UK government will add a further 20% in tax relief, taking the total invested to £3,600. This means that the money invested can benefit hugely from the power of compound interest, where even making small contributions early on results in a significantly larger pot over time. However, just as with any pension, the money invested cannot be accessed until the pension owner reaches the age of 55.
Investment trusts are a great way to create a financial legacy for your children, due to their outstanding record of paying consistent dividend payments and longer-term investment outlook. More importantly, it’s possible to place them outside of your estate for Inheritance Tax purposes. For example, you can invest directly into an investment trust on your children’s behalf, either by placing the investment trust shares into a ‘bare trust’ or via a Junior ISA.
The Association of Investment Companies (AIC), the trade body which represents investment trusts, publishes an annual list of ‘Dividend Heroes’ and ‘Next Generation Dividend Heroes’. These are investment trusts that have increased their dividend pay-outs for more than 20 years and 10 years, respectively, in a row.4 Several investment trusts within the Janus Henderson range are in both categories – reflecting the quality of their investment offering. Whatever your attitude to risk, regional or sectorial focus, you’ll find an investment trust that suits you. However, it’s important to bear in mind that all investments come with an element of risk, and that regardless of how long you choose to invest, there’s always a chance you might still get back less than you invested.
Find out more
For more information on investment options and the steps you can take to secure your family’s future, download our latest guide. There’s also a wealth of information for parents on our Biggest Investment Hub.