Why putting the “money” conversation back on the table has never been more important for families

As the cost of living crisis continues to make life difficult for some families, money could be a frequent conversation in your home at the moment.

The rising cost of living, exemplified by a 40-year high in the rate of inflation, could be causing you financial stress, no matter your circumstances. According to the Commons Library, 83% of adults reported an increase in their day-to-day costs in March 2022.

For some families, money is a taboo subject that isn’t regularly discussed. If that sounds familiar to you, it could be that broaching the topic of money in these trying times has been challenging for you and your loved ones.

However, the cost of living crisis is providing families with the opportunity to open up conversations about money and communicate their goals more effectively.

Read on to find out why putting the “money” conversation back on the table has never been more important for families. Plus, discover how your Bowmore financial planner can help mediate these conversations and gain the best outcome for everyone involved.

Talking about your finances as a couple could save you arguments as well as money

A 2022 Royal London study has revealed that 62% of couples claim money is the leading cause of arguments between them. This could be prompted by a lack of communication where finances are involved.

Indeed, talking about money with your significant other might not be romantic, but it is fundamental to aligning your goals and ensuring you are on the same path.

Plus, sharing information about your individual incomes and inheritances with one another can save you money, as well as awkward discussions down the line.

Through financial conversations with your significant other, you could also maximise the efficiency of your money by utilising key tax allowances. Here are four allowances you and your spouse could maximise by working together on your financial goals.

  1. The £3,000 annual exemption amount

When you begin estate planning, it is important to consider how you and your partner can work together to reduce the amount of Inheritance Tax (IHT) your beneficiaries might pay.

The annual exemption amount allows you to gift up to £3,000 a year tax-free to whoever you choose. You can split this amount in any way you like. By giving this money as part of your children’s inheritance, you can reduce the value of your estate and allow them to pay less IHT when you pass away.

Crucially, this is an individual allowance. So, if you both wish to give money each year to adult children, you can bestow £6,000 a year between you.

For more insights on mitigating IHT, read our article on how to avoid being caught out by Inheritance Tax.

  1. Potentially exempt transfers

Although the annual exemption sits at £3,000, you can technically gift any amount of money to your loved ones. This is known as a potentially exempt transfer (PET).

If you gift an amount more than £3,000, you will not immediately be taxed. However, if you pass away fewer than seven years after the gift is bestowed, the gift will be subject to IHT.

Unlike the standard 40% IHT charge, PETs exist on a sliding scale, known as taper relief.

Source: HMRC

Remember, taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

If you wish to mitigate your IHT liability over the years, it could be constructive to begin gifting sums of money as early as possible. If you make a PET earlier in life, it may be less likely to be subject to a tapered relief IHT charge.

3. The Capital Gains Tax allowance

You are liable to pay Capital Gains Tax (CGT) when you earn profits from selling certain assets, including:

  • Stocks and shares that aren’t in an ISA (or PEP)
  • Properties that aren’t your main residence
  • Personal possessions worth more than £6,000, excluding your car
  • Business assets.

The CGT allowance will stand at £12,300 until 2026.

However, just like the annual exemption amount, this is an individual allowance. So, by working together to sell assets individually, you could form a CGT “allowance” of £24,600 between both of you, helping limit your CGT liability in any given tax year.

4. The Marriage Allowance

If one spouse does not pay Income Tax, you can use the Marriage Allowance to mitigate the amount of Income Tax the other spouse pays.

A person who earns less than the Personal Allowance of £12,570 a tax year can “gift” up to £1,260 of their Personal Allowance to their spouse or civil partner, as long as they are a basic-rate taxpayer.

For example, if you earn £5,000 a year, you have £7,570 of your Personal Allowance left. So, if you transfer £1,260 of your Personal Allowance to your spouse who pays basic-rate Income Tax, their Personal Allowance will now equal £13,830. This means they will pay less Income Tax overall, as their Personal Allowance has increased.

Including your children in your estate planning conversations can help manage expectations

You may often discuss your inheritance plans with your significant other or financial planner. But have you ever discussed your estate plans with your adult children?

You may be surprised to learn that, according to MoneyAge, UK adults tend to vastly overestimate the inheritance they are due to receive. Indeed, the average UK adult expects to receive more than £130,000 in inheritance – when in actual fact, ONS figures show that the median inheritance sits at around £50,000.

Keeping your beneficiaries in the dark could lead them to have unrealistically high expectations of their inheritance. This might cause them to overspend on their current income. Worse still, it could cause family arguments and fractured relationships down the line.

Starting the estate planning process early and giving gifts within the annual exemption amount while you’re still alive could be extremely constructive for mitigating IHT.

By lowering the value of your estate before you pass away, your beneficiaries can avoid paying IHT on their entire inheritance – because they’ve received some of it through tax-efficient gifts already.

Aligning your goals as a family can help you achieve them more efficiently

If you and your family have opposing goals, dreams and ideals about your money, it could make it harder to stay on track with your savings and plan for the future.

Your Bowmore financial planner can mediate key conversations between you and your spouse or your adult children, to make sure you are on the same page and help you create a positive vision for your future.

Get in touch

In these trying times, everyone could do with financial support. If you would like to discuss your finances as a family, email enquiries@bowmorefp.com or call us on 01275 462 469.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

Bowmore Financial Planning Ltd is authorised and regulated by the FCA.

Bowmore Financial Planning Ltd is not regulated to provide tax advice.

This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.