Why you should talk to your children about their inheritance

WITH more people being dragged into inheritance tax (IHT) - thanks largely to high house prices and frozen IHT thresholds - I want to know what I can do to protect my children now… for when I’m no longer around.

Inheritance taxes raised a record £7.1bn in the latest financial year - that’s £1bn more than in 2021/22. And while the majority of estates don’t pay inheritance tax (you can read more about how IHT works here), if the freeze of IHT thresholds continues beyond the newly extended 2028 date and house prices continue to rise, more ordinary people - like myself - may well get caught up in this fiscal drag.

If you’re the slightest bit unsure as to whether this might be you in years to come, it’s worth taking action now. And while dying might not be nice to think about, let alone talk about, getting your financial ducks in a row now could help give you peace of mind. Making a will is a vital first step. And if you then talk to your children about your plans, they’ll be much better equipped to deal with the financial side of things when the time comes. 

My mother passed way too young, when I was in my 30s. And I certainly appreciated having this particular talk. Here are some pointers to start the conversation.

1. Who pays inheritance tax

One of the first things your children might want to know is who pays inheritance tax. The job of actually making the payment to the taxman falls to the ‘executor’ - someone legally recognised to deal with your estate after you die. And any tax due is paid from the estate itself. In most cases beneficiaries don’t pay IHT, although they may stand to inherit less as a result of the tax. 

Of course, if your children are both the executor and beneficiary, the responsibility will lie with them. This might be something you want to discuss. 

2. The will itself

Go through your will with them. If you’d like your children to be the executor of it, discuss what this means. It’s a job that requires admin and paperwork and you may feel this is too much of a burden. That’s OK, you can appoint anyone else that you trust to do the job. Whatever you decide together, make sure that you keep your will up to date and ensure you have key financial information collected together to make the executor’s job a bit easier. 

Things change over time, so it’s worth reviewing your will after big life events to check that it still meets your needs. It will help your children to understand in advance what to expect. 

3. Don’t forget your pension

Chancellor Jeremy Hunt announced a number of pension reforms in the 2023 Spring Budget. Along with other changes, he raised the annual allowance from £40,000 to £60,000 and made plans to abolish the lifetime allowance of £1,073,100 from 6 April 2024 (for 2023/2024 the excess charge will be removed). 

This is good news if you’re looking to reduce your IHT tax bill. Why? UK registered pensions schemes typically sit outside the value of your estate for IHT purposes so you can use your pension to minimise the tax that will be owed on your estate. You can read more about the Spring Budget pension reforms here and your children can read about what happens when you inherit a pension here. 

Make sure your Expression of Wish form for your pension is up to date too. This form allows you to name who the beneficiaries of your pension are. If you hold a Self-Invested Personal Pension with Fidelity you can find the Expression of Wish form here.

4. Think about what you can gift in advance 

There are lots of ways to lower your inheritance tax bill by making use of gifting allowances. Have a conversation with your children to find out what their own financial needs might look like in the future. From the seven-year rule for gifts, to paying for a wedding and regular gifting from your income - there are ways to pass on your wealth while you’re still around to see your children enjoy your generosity. Read more about gifts and inheritance tax. 

5. Consider taking financial advice

If you’ve got more than £100k and you want to build your wealth before passing it over and are looking for more of a personal financial recommendation - you might want to think about financial advice. Fidelity’s financial advisers welcome bringing family into the discussion. This will allow you to take yours and your children’s considerations into account. Learn more about financial advice.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). Tax treatment depends on individual circumstances and all tax rules may change in the future. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.