Christmas is a time for giving and what better way to celebrate than to share some of the proceeds from the sale of your business with your children. But if you decide to start passing down your new-found wealth it’s important to avoid the potential pitfalls of doing so.
For one thing, your kids may not be ready to handle large amounts of wealth. They could squander the money, or it could sap their ambition and leave them relying on the money you give them rather than their own efforts and achievements.
And even if you think your child could benefit from the money there’s another question that many parents prefer not to confront: do you trust their spouse? A marriage breakdown could see half of the money you give them disappear with an ex-husband or ex-wife.
Fortunately, there are ways to protect the money you give and to ensure that it is passed on tax-efficiently, but they are complex and you may need the help of a St. James's Place Partner to get it right.
While giving money to children now can remove it from your estate so that they don’t have to pay inheritance tax (IHT) on it when you die, there are strict rules about how you can do that if you want to avoid a hefty charge.
While you can hand over any amount you like, if you die within seven years of making the gift there could be an IHT charge of up to 40%. There are specific gifts you can give every year, such as the £3,000 gifting exemption, but if you have just made millions from a sale they may not allow you to give as much as you’d like.
A St. James's Place Partner will be able to advise you on the best strategy for passing down your new-found wealth, but one option could be to place it trust for your children. This is basically a gift with strings which can prevent the money being squandered while starting the clock on the seven-year rule to remove it from your estate.
Question of trusts
There are various forms of trust, but the basic structure is that a trustee holds money for the benefit of a beneficiary, which in this case would be your child. An absolute trust would give them access to the money at 18 but with a discretionary trust the trustee decides, often acting on your wishes, what gets paid, how often and to whom.
By using some forms of trust, such as discretionary gift trusts, you can keep a measure of control over the money.
You may not want to give your children the money now but limit the amount of IHT they will pay when you die. Some types of investment qualify for Business Relief, meaning they are removed from your estate and there is no IHT to pay after you have held them for just two years, and if you need the money in future you could always sell them. However, these types of investments tend to be suitable only for those willing to take a risk with their capital, which means they will not be suitable for everyone.
Passing on the proceeds of a business sale to your children is complex and if you want them to enjoy the maximum benefit you will probably need to speak to a St. James's Place Partner.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
Advice regarding a trust will necessitate the referral to a service that is separate and distinct to those offered by St. James’s Place. Trusts are not regulated by the Financial Conduct Authority.