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06th July 2020

Providing for the younger generation

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The coronavirus pandemic has and will have wide ranging economic effects. One of which may be that younger generations are hit financially harder than the older generations. This article looks at ways to help them out. Many young people will have lost jobs in the hospitality and travel industries or may have suffered a reduction in their income as a result of furloughing. However, you may be in the fortunate situation that your financial position has not significantly worsened. A few are actually better off with the enforced reduction in spending on entertainment and travel.

These are some of our suggestions for helping the next generation; we would be happy to discuss your particular circumstances to help you find the best method to help your family.

Outright Gifts

Conceptually the simplest way to make provision for someone else is to make an outright gift from cash savings to the person you wish to benefit. There are no formalities around this except for keeping a record for your own purposes that the gift has been made. If you survive the gift by 7 years it falls out of account for inheritance tax purposes (so is not taxed if you die after the 7 years) and there are no income tax or capital gains tax consequences.

Of course, there are risks to be considered (debt, death or divorce for example) and so other methods may be preferred.

Bare Trusts

If you wish to provide for your grandchildren’s education, you might hold funds on a “bare” trust for the grandchildren. This does not have the formalities required for other types of trust. The money is treated as belonging to the grandchildren and they will be entitled to it when they are 18. While they are under that age it can be used for their benefit. If the intention is to spend the money for their benefit it may not be a problem that they will be entitled to the money at 18 as it will mostly have been spent by then – by you on “suitable” things, such as school fees. This is treated in the same way as a gift to an adult for inheritance tax purposes. In other words, provided the gift is survived by 7 years it escapes inheritance tax. Using a bare trust to make the gift early, and in one go, triggers the start of the 7 year clock earlier.

For income tax and capital gains tax, the money in a “bare” trust is treated as belonging to the grandchild so that the family gains the use of the grandchild’s income tax and capital gains tax allowances. We are able to help with the creation of such a trust which will ensure that income and gains are treated as the grandchild’s. Please note there are complexities with this for income tax purposes if the gift is made by a parent.

Bare trusts may have more favourable tax treatment, but still need careful drafting.


If you prefer to make a gift from assets you need to be aware that there could be a capital gains tax (CGT) cost – planning for which is often overlooked by non-specialist advisors. Gifts are taxed like sales. If you are making a gift of an asset which has increased in value during your period of ownership, you are deemed to have sold it and so will make a gain on which you will have to pay capital gains tax. If you do not survive by 7 years you can find yourself in the position of double taxation! Where you have paid capital gains tax and the gift is also taken into account for inheritance tax purposes on your death. However, even if you do not survive by 7 years what is taken into account for inheritance tax is the value of the gift at the time it is made. Any increase in value after the gift takes place free of inheritance tax. At present you may have assets which have reduced in value which offers the opportunity of making the gift and realising a smaller gain than might have been the case if the gift had been earlier in the year.

Formal Trusts

If you are concerned about the capital gains tax cost of making a gift of assets, there are ways to postpone payment if you give the assets to a trust (a formal one, not a bare trust), instead of outright.

The disadvantage of making a gift to a trust is that care is needed on the timing and the amount that goes in and which half of a couple it comes from. If this isn’t done correctly, inheritance tax is payable immediately at 20% on all or part of the trust gift.. If you die within 7 years the gift is then looked at again and inheritance tax is calculated at the rates applying at your death with credit given for the inheritance tax already paid, so a further 20% could be payable Yet even so, this can result in less IHT overall being paid than would otherwise be the case.

Properly structured and timed though, couples can protect up to £650,000 from Inheritance Tax (or even more using the right assets). Then do the same again 7 years later.

You also have to be aware that inheritance tax is potentially payable every 10 years on the value of the assets in the trust and also when assets leave the trust, but the maximum rate of tax is 6% and some never pay inheritance tax. If the value which is placed in the trust is less than the nil rate band there will be no inheritance tax on assets leaving the trust within the first 10 years. This can be very useful if you have an asset with a depressed value now which you expect to increase in value over the next 9 years.

Trusts offer the opportunity to potentially remove a significant amount of value from your estate inheritance tax free – but also to postpone making the decision about who should receive it, and at what age, for at least another 9 years.

The other advantage of a trust is that the money given to it can be set aside to be used in the future for one or more of a group of beneficiaries even those who have not been born yet.

A trust will require a certain amount of administration. It is a separate entity for tax purposes and it may be necessary to submit annual tax returns and register the trust with HM Revenue & Customs. Accounts should also be maintained. These are all things we are able to help you with should you wish to use a trust.

We can guide you through the advantages (and risks) of trust arrangements and ensure it meets your objectives.

As a recent case demonstrated, it is crucial to take specialist advice to set up any trust correctly from the start – even if it is “only” a trust of a life insurance policy. Remember, your financial advisor and the insurance companies are not usually liable for loss, tax or court fees if you set it up incorrectly, as they do not have a solicitor’s duty of care in that respect. Courts will often bend over backwards to help, but even then the court costs can be tens of thousands of pounds.

Normal Expenditure Exemption

If your expenditure has reduced, but not your income, now might be the time to consider whether you can make gifts as part of your normal expenditure out of income. When these gifts satisfy certain conditions they can be exempt from inheritance tax. Broadly, the conditions are that you must establish a regular pattern of giving and those gifts must be made out of your “surplus income”. Care is needed in identifying what counts as income or expenditure for this purpose as they are often not what people assume. If you have a surplus of income over expenditure and the regular gifts are within this surplus they will be exempt from inheritance tax. It is even possible to structure things so that you can claim the exemption even if you are only able to make the first payment in a planned series of regular gifts.

The only downside of this is that on your death your executors must produce a schedule of all your income and expenditure for the years during which you are making the gifts. This can be a very big exercise if it is only done retrospectively, unless you keep meticulous records. However, we can help you understand the conditions which have to be satisfied to achieve the exemption and enable you to keep those records yourself to help your executors.


Some people may consider making loans to the younger generation, which can be helpful if you are providing initially for only one out of a group of people you might like to benefit. This is because either the value of the loan will come back into your estate or because you can waive the loan (turn it into a gift) at a time when you are able to make matching gifts to other people. Thus, ensuring a degree of equality between the recipients.

There are some issues to consider when making loans. The first is that the loan remains an asset of your estate, so you have not moved any value out of your estate. If the time comes to waive the loan (that is turn it into a gift to start the 7 year clock ticking) HM Revenue & Customs will only accept this if it is done in a very particular way. We can help with this.

You also need to think about whether the loan is to carry interest as if done in certain ways that can result in it all being taxed on you in one tax year, pushing you into higher marginal rates of tax that year.

A practical problem with loans arises if the person you have lent money to wants to take out a mortgage using the loan as the deposit. Most mortgage lenders will not lend if someone already has other loans. Back to considering gifts!

This is an outline only of some of the steps you could take. No action should be taken based only on the information here. You should take appropriate professional advice tailored to your specific circumstances.

For more information on any of the items raised in this article please contact Carolyn Bagley by clicking here.