Independent financial planner Thomas Dickson from Wealthwide discusses how dentists can help their children and grandchildren financially during tough economic times.
Many parents and grandparents are keen to provide financially for the next generation. This is increasingly common given the significant increase in the value of properties in the last few decades; the recent increase in energy prices and overall cost of living.
Many dentists are in a position to do this as they benefit from a generous NHS pension scheme and are able to take full benefits from the age of 60.
However, there are a number of important issues which should be considered before passing significant sums of capital to children or grandchildren:
- You might need some of the capital yourself for later life
- Having too much money handed to you at a relatively young age is not always a good thing – any significant gifts could take away the drive and motivation your children/grandchildren have
- We’ve seen examples where the son or daughter in-law have been uncomfortable with overly generous gifts and would prefer to make their own way financially
- There’s a risk that your child could get divorced and lose 50% or more of your gift in a divorce settlement.
So, what are the options and how do you establish which one is the most appropriate? I’ve listed below four solutions we’ve worked through recently with clients.
Provided you trust your children or grandchildren to manage the money prudently and you are confident it won’t affect them negatively, you could gift a large amount of capital directly to them in your lifetime.
This can be a great idea in terms of helping a grandchild get on the property ladder; helping your son or daughter through a difficult financial period – perhaps if they have a young family; or providing the seed capital for someone in the family to start a business.
There are, however, some restrictions:
- To avoid the gifts being liable to inheritance tax (IHT), you have to survive seven years after making the gift
- The gift has to be made on a ‘no strings attached’ basis. So you need to be certain you can really afford it as you can’t ask for the capital to be repaid at some point in the future.
To avoid some of the above issues, another popular route is to set up a trust and gift capital into that.
Although you can give as much money as you like to family members without any immediate tax charge, there are restrictions on the amount you can gift into a trust.
If you gift more than the nil rate band into a trust, the capital is subject to a lifetime inheritance tax rate of 20%, so most people limit their gifts into trust to £325,000.
Provided you survive seven years, you then have the option to gift another £325,000 – so if you have a substantial amount of capital you may need to start planning sooner rather than later.
3. Personal pensions
If you have enough income from your NHS pension, and other sources such as investment or rental income, it might make sense to leave your pensions invested rather than draw any income.
This means you can pass on the value of your pensions to your surviving spouse and then to your children. Pension funds are exempt from inheritance tax, so this can be extremely tax efficient.
It’s worth noting however that if you die after age 75, the funds are taxed at your beneficiaries rate of income tax. I’ve written about how to work out what your NHS pension is likely to be worth at retirement here.
4. Family investment companies
Some wealthy dentists set up a Family Investment Company (FIC) where the shareholders are family members of a private limited company.
The company is usually set up by parents or grandparents, with a mixture of voting and non-voting shares, as well as different classes of shares, each with differing rights. This allows for different dividends to be distributed to shareholders.
The company can then invest the capital in assets such as property or the stock market. This is a great option to transfer capital down the generations tax efficiently, whilst allowing the parents to retain control over assets.
Managing significant wealth effectively, to ensure it provides for you and your family can be a tricky and complex operation.
In the same way that it’s important to see a specialist dentist if you have a specific issue, I would encourage dentists to seek advice from professional and specialist advisers to help them make the most of their capital and avoid making expensive mistakes.
For more ideas of how to invest or gift a significant amount of capital, please see our article Spend Gift or Invest?
Thomas Dickson is a chartered financial planner at Wealthwide. Visit www.wealthwide.co.uk.
Please be aware of the following investment risks:
- The value of your investment can go down as well as up and you may not get back the full amount invested
- When investing your capital is at risk
- Levels and bases of, and reliefs from taxation are subject to individual circumstances and may be subject to change
- The Financial Conduct Authority does not regulate taxation and trust advice
- Information is provided only as an example and is not a recommendation to pursue a particular strategy.