Effectively Planning For Intergenerational Wealth Transfer

Passing on wealth to future generations effectively and preserving as much as possible – doesn’t need to be complicated. It does, however, need to be very carefully thought through. It’s not as simple as deciding ‘who gets what’ and ensuring your wishes are expressed in a will. It’s about careful planning and the right advice so your loved ones can benefit from your hard work.

Leaving a legacy has emotional, practical, and financial implications. Wealth may have been passed down through the generations to you. Alternatively, it may only recently become of significance in your family. Either way, what happens next is of paramount importance. Failing to make the right plans at the right times can be expensive and very difficult to navigate for those left behind.

What generational wealth is and why it matters

We need to pay taxes and other duties when we die. But how much we pay can be carefully managed in advance. And how much is paid in taxes will determine how much is left over for our loved ones. Getting it wrong can even end up costing families money.

Our current climate includes uncertainty, inflation, rising property values, and potential pension shortfalls due to increased life expectancy. It’s never been more vital to ensure we do the right thing for our future generations. We should be looking at ways to avoid inheritance tax traps and where we can invest for our children. We need to start thinking about how we plan for retirement and even care fees in a way that preserves as much wealth as possible going forward.

How the wealth transfer landscape is changing and what it means for you

A lot will change over the next 20 years or so. The ‘baby boomer’ generation is ageing and will be passing on the wealth they accumulated in better economic circumstances. The way we live has also changed. There are a lot of blended families and people are retiring for longer periods of time. Many adult children now need more financial help, sooner. All these elements add a layer of complexity that needs careful navigation.

Research by Vanguard estimates that, over the next 30 years, more than £7 trillion of wealth will be passed down to younger generations. In a world where financial resources are becoming harder to generate and hold on to, we need to do all we can to ensure wealth is passed down as efficiently as possible. Careful financial planning can help with this.

Common inheritance tax (IHT) traps to avoid

The threshold for paying IHT is £325,000, at which point inheritance tax is payable at 40%. You can gift an amount of £3,000 per year and there are also small gift and wedding/civil partnership gift allowances¹. If you leave your main residence to direct descendants, you may also benefit from the residence nil rate band (RNRB) which could mean an extra allowance of £175,000 per person.

However, people often make these common mistakes:

• Forgetting that gifts given within the seven years prior to death may be subject to inheritance tax.
• Failing to use the £3,000 and other gift allowances.
• Not taking into consideration an adequate liquidity plan for property.

Strategies to mitigate IHT costs

• Using a strategy of ‘lifetime giving’.
• Putting money into trust and other appropriate vehicles.
• Taking advantage of business and other applicable reliefs where possible.
• Having the correct life insurance policies for inheritance tax planning.

Invest now with the next generation in mind too

There are ways to use and invest your money now that will have positive effects on how much inheritance tax you will need to pay in the future.

• Junior ISAs and pensions for children are tax efficient ways of saving money that have long-term growth potential.
• Bare trusts and Junior ISAs enable the gradual transfer of wealth that will not be subject to IHT.
• Making regular gifts from surplus income (it really must be surplus) is an underrated tool for avoiding IHT.

You’ll find more information in our blog Ways To Save Money For Kids Tax-Efficiently

Retirement income and your asset drawdown strategy

How you draw down money during your retirement years will affect your estate. Draw from ISAs and taxable accounts within your annual capital gains tax allowance before pension pots. This reduces the size of your taxable estate over time and lets your pensions continue to grow.

Factoring in the right things when you’re forecasting your cashflow requirements – and making sure you have room to be flexible – are key.

You’ll find more information in our blogs, Why You Should Review Your Pension and Proposed Changes to Inheritance Tax in the UK: What You Need To Know.

Long-term-care costs – the hidden drain on inheritance

The costs of long-term care can erode the value of an estate – particularly as we are living longer and are likely to need more care as we age. This is leading to some people having to sell their homes or use their life savings to fund care. This can obviously reduce or wipe out inheritances.

Gifting money and assets can be seen as an attempt to avoid having to fund care fees and receiving state support. The Deprivation of Assets rule can lead to unpredictable consequences so it is important to take proper advice.

You’ll find more information about care home fees planning in our blog Care Home Fees Planning Mistakes To Avoid.

Creating a holistic generational wealth plan

Planning early and using the right information and expert advice can mean a world of difference to what the next generation will receive of your estate. Starting early gives you more flexibility and more options over time. Make sure you involve the next generation with your planning. Don’t forget to explain the importance of planning early and wisely to them too!

Working with a financial planner can help you in many ways. Here at Paula Bicknell Wealth, we can advise you of the right strategies for your circumstances. We’ll help you ensure the next generation benefits from all your hard work – and that it doesn’t disappear in taxes.

Get in touch with us now for a no-obligation consultation. And if you’re already our client, make time to review your finances with us. We are based in Theale, Reading, if you’d like to meet us in person. Alternatively, we work with our clients remotely too. It’s never too early to start planning!

Not sure what a meeting with a financial adviser involves? You’ll find more information in our blog Your First Meeting With A Financial Adviser.

The value of an investment with St. James's Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief is generally dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

¹How Inheritance Tax works: thresholds, rules and allowances - https://www.gov.uk/inheritance-tax/gifts

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Although the content of the article was correct at the time of writing, the accuracy of the information should not be relied upon, as it may have been subject to subsequent tax, legislative or event changes.