How to improve your family financial planning

by Jul 18, 2023Finance

Family financial planning helps you prepare for both the predictable and the unpredictable, safeguarding the futures of spouses, partners, children, and other dependents.

Starting early enables you to maximise the benefits of tax-advantaged savings options while lowering any inheritance tax (IHT) liable on your estate and assets.

While some aspects of financial planning are more complex than others, like trusts, saving with savings accounts and ISAs is relatively easy to get to grips with.

Let’s dive in.

Consider inheritance tax 

There are two certainties in life… you know how the rest of the phrase goes.

Inheritance tax is a 40% tax applied to the portion of an estate exceeding the £325,000 threshold (as of 2023). This can be raised to £500,000 if you leave your home to children or grandchildren.

Here’s one thing many people forget about inheritance tax: gifts given within seven years before your death could be subject to IHT, including those given to family and friends or put into certain types of trusts.

If you can spare the money, consider giving away gifts from your surplus income or assets within the £3,000 annual gift exemption to lower the value of your estate over time.

Savings accounts

Savings accounts are a simple and safe way to put money away for the short and medium term.

Easy-access savings accounts are similar to current accounts, whereas notice savings accounts and savings bonds lock money away in return for a higher interest rate (usually for 6 months or longer).

Individual savings accounts (ISAs)

Starting in early adulthood and continuing into retirement, ISAs are a tax-efficient method for growing savings.

You pay no Income Tax on the interest or dividends you receive from an ISA, and profits from investments are exempt from capital gains tax (CGT).

1: Cash ISAs

Cash ISAs are essentially savings accounts with tax-free interest. They’re ideal for short-term savings.

2: Stocks & shares ISAs

Stocks & shares ISAs allow you to invest in various assets, including shares, bonds and funds, without paying tax on any gains.

3: Innovative finance ISAs

Innovative finance ISAs offer a tax-free way to invest in peer-to-peer lending platforms.

4: Lifetime ISAs 

Lifetime ISAs are designed for two significant life events: buying your first home or retirement.

You can save up to £4,000 a year in a Lifetime ISA, and the Government adds a 25% bonus to your savings, up to £1,000 per year – which is fantastic.

Trusts for family financial planning

Trusts offer a structured method for managing your assets throughout life. There are four types of trusts which suit different situations.

1: Bare trusts

Bare trusts mean the trustee holds the assets for a specific beneficiary who obtains an absolute right to the assets when they turn 18 (or 16 in Scotland).

Example: To fund your grandchild’s university education, you can set up a bare trust with a sum of money, which becomes their property when they turn 18.

2: Discretionary trusts

With a discretionary trust, the trustees decide how to distribute the trust’s assets among the beneficiaries, who could be other family members or charities.

Example: If you have a child with a disability, you could use a discretionary trust to secure their financial future. The trustees would manage and distribute funds according to the child’s needs.

3: Interest in possession trusts

Interest in possession trusts work best when you need to provide for someone while preserving the capital for the future.

Example: If you want your spouse to benefit from the income of your estate (like rent from a property) during their lifetime but want the property to pass to your children after your spouse’s death, this would be ideal.

4: Settlor-interested trusts

Settlor-interested trusts are appropriate when you, the settlor, need to retain some access or benefit from the trust’s assets.

Example: A settlor-interested trust would be an appropriate choice if you own a rental property and wish to put it into trust while still receiving the rental income.

Get started early

Family financial planning typically involves a blend of savings accounts, ISAs and trusts.

The earlier you start, the more you can compound interest and leverage tax-advantaged options like ISAs.

While anyone can take advantage of savings accounts and ISAs, setting up trusts are a little more complex and benefit from a financial advisor.

We can help you to understand how tax applies to your family financial planning strategy – get in touch to find out more.

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