Wealthy parents express concern about their children misusing inherited wealth
A growing number of high-net-worth parents are choosing to donate more to charity as a means to reduce their inheritance tax (IHT) exposure and avoid leaving large inheritances to their children, according to a recent poll commissioned by Rathbones.
The poll found that 53% of these parents have increased the amount of money they donate to charity, with the primary aim of reducing their children's expected windfall and curbing IHT exposure. This trend is driven by concerns about the impact of large inheritances on heirs, such as the fear that children may not manage the wealth wisely, or that significant inheritances might cause sibling rivalries or legal disputes.
Olly Cheng, financial planning director at Rathbones, stated that more clients are aiming to strike a balance between reducing their IHT burden, supporting good causes, and leaving an inheritance that doesn't dampen their children's ambition. Six in 10 of these parents believe their beneficiaries already have enough money, further emphasising their desire to avoid leaving large inheritances.
Charitable donations help reduce the size of the taxable estate, thus decreasing IHT liability. Increasing donations to charity is seen as an effective method to curb IHT exposure. There are strategic planning options such as contributions to children's pensions (locked until retirement) that also allow for tax-free growth and reduce the taxable estate size.
This trend towards charitable giving reflects a shift towards more engaged, lifetime giving and strategic estate planning in a complex tax environment. Additionally, philanthropists increasingly prefer to see the impact of their charitable giving during their lifetime rather than leaving large posthumous bequests.
Regarding estate tax laws, the current high exemption thresholds benefit only the wealthiest, but there is uncertainty about future changes. This uncertainty motivates high-net-worth families to consider charitable giving as both a legacy tool and a tax strategy.
The government's changes to the treatment of pensions and the carve-outs for agricultural and business properties in relation to inheritance tax will impact the estate planning strategies of high-net-worth individuals, including farmers and family business owners. From April 2027, the Exchequer will treat pensions as part of someone's estate for IHT purposes, while the Agricultural Property Relief and Business Property Relief carve-outs have been closed, allowing farmers and family business owners to pass down assets free from IHT.
The threshold for IHT has been frozen at £325,000 since 2009, causing an increase in estates liable to the tax. The government's changes aim to make the inheritance tax framework more equitable. The Chancellor has tightened up several decades-old reliefs to generate revenue and make the framework more equitable.
In conclusion, the avoidance of large inheritances by high-net-worth parents is driven by concerns about the impact on heirs, while charitable donations offer a means to reduce IHT liability and support personal philanthropic goals. This trend reflects a shift towards more engaged, lifetime giving and strategic estate planning in a complex tax environment.
- High-net-worth parents are choosing to donate more to charity as a means to reduce their inheritance tax (IHT) exposure and avoid leaving large inheritances to their children, while also supporting their personal philanthropic goals.
- Charitable donations not only help reduce the size of the taxable estate, thus decreasing IHT liability, but also offer an effective method to curb IHT exposure.
- Additionally, increasing donations to charity is seen as a strategic planning option, as contributions to children's pensions also allow for tax-free growth and reduce the taxable estate size.
- As a result, the growing trend towards charitable giving by high-net-worth parents reflects a shift towards more engaged, lifetime giving and strategic estate planning in a complex tax environment.
