We are entering an unprecedented era of wealth transfer. Indeed, British families are expected to pass £5.5 trillion between generations over the next four decades.¹

There are a number of factors underlying this trend.

For example, our wealth has been boosted by house prices, which have soared by more than 40% on average since 2010 ². Likewise—coronavirus aside—we’ve benefitted from the longest-ever equity bull market at the same time as the dawn of pension freedoms that give us more flexibility in the deployment of our retirement savings.

We now have the opportunity to pass on more wealth than ever. However, it is important to consider tax bands and thresholds so taking advice when doing so is crucial.

After all, if the transfer of wealth is not executed properly families might end up handing more of their hard-earned savings to the taxman than they need to.

In fact, a lack of planning is at least part of the reason why the average UK inheritance tax bill currently sits so high, at £179,000.³

Here, we look at three ways in which the expert advice of financial advisers can help to “unlock” significant amounts of family wealth…

1. Sharing financial goals

One recurring issue surrounding the intergenerational transfer of wealth is the reticence of family members to share the same adviser.

This could be for several reasons but a common issue is that individuals worry about their financial details passing on to relatives. However, aside from the fact that advisers abide by strict confidentiality rules, the truth is that a single-family adviser can offer many advantages.

For example, taking a group approach to advice allows different generations to understand each other’s financial goals more precisely.

Indeed, if an adviser knows that the parents plan to pass on a certain amount of their legacy, then they may be able to better prepare for their children’s financial future. Likewise, if a family member learns that their offspring requires financial assistance for a property purchase, then advice could be taken on whether passing the money down today could be more tax efficient.

All-in-all, considering how you can make advice work for your family as a whole could prove to be a highly valuable step in the right direction

2. Planning ahead

Waiting until the very last minute is another common problem when it comes to intergenerational wealth planning.

Some older family members may be put off estate planning due to concerns around their own future wealth needs and the ways in which their offspring will spend their legacy.

These concerns may have merit, but leaving things too late carries its own set of risks for everyone involved in the transfer.

The truth is advisers can create a tailor-made succession plan for anyone looking to make the most of the wide range of IHT reliefs and allowances.

However, if a family member falls seriously ill very quickly and unexpectedly, they may find they do not have enough time—or may even be physically unable—to seek advice.

An adviser should be sought at the earliest point possible to avoid this and ensure the largest possible portion of one’s legacy passes through the generations.

3. Understanding the rules

A third significant oversight by many is that, while they are transferring wealth between generations, they are not doing so in the most tax-efficient way.

When a person dies, all of their possessions plus any gifts made during the last seven years of their life are combined to give the value of their estate. 

The taxable value of the estate for Inheritance Tax purposes is calculated by taking the estate value and deducting a nil-rate band, which currently is £325,000, plus an additional £175,000 residence nil rate band if a home is being passed to a direct descendent. Inheritance Tax is currently charged at 40%. 

There are exemptions for certain bequests, such as anything left to a spouse or civil partner or to a charity and specific circumstances where the nil-rate band may be higher.

Most gifts made during a person’s lifetime are normally known as potentially exempt transfers, and if the person making the gift survives for seven years or more, no IHT is payable, irrespective of the amount which has been given.  Gifts made more than three but less than seven years before someone dies will be liable to IHT at a reduced rate, on a sliding scale. 

However, there are certain gifts that may be made during a person’s lifetime, which are exempt from IHT.  The most common exemptions are shown below:

• There’s usually no Inheritance Tax to pay on gifts you make out of any excess income you may have, as long as this does not harm your standard of living. 
• There’s also no Inheritance Tax to pay on gifts between spouses or civil partners as long as both parties are UK domiciled.
• You can give £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’, and you may carry any unused annual exemption forward to the next year - but only for one year.
• You may make a gift of up to £5,000 to your child if they get married or enter into a civil partnership.  You may make a gift of up to £2,500 to a grandchild, and up to £1,000 to anyone else who marries or enters into a civil partnership.
• There is no IHT to consider if you make payments to help with another person’s living costs, such as an elderly relative or a child under 18.
• You can use more than one of these exemptions on the same person - for example, you could give your grandchild gifts for their birthday and wedding in the same tax year.
• Finally, you can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.
• Gifts to charities and political parties are exempt from IHT during your lifetime and when you die.

With trillions of pounds expected to pass down through the generations over the next few years, it is crucial that families who want to avoid unwillingly falling at these hurdles, consult an adviser who can help mitigate the tax burdens and maximise returns from transferred wealth.

Consider this – according to the think tank, The Policy Exchange, average house prices in the UK are forecast to be £780,000 by 2040 - more than triple the current average house price of £244,000.

The average first-time buyer is currently aged 32. Inflationary effects aside, that’s a lot of money going to be needed in deposits alone in 26 years’ time and many will be reliant on savings from their forebears.

All-in-all, British families have an unprecedented opportunity to support the next generations through the transfer of record amounts of wealth. Given the complex rules surrounding inheritance tax, expert advice will be essential in making the most of their legacy.

Sources:

1. What are the real implications of intergenerational wealth transfer? - FTAdviser.com

2. Where have prices risen most since 2010? | Property blog (rightmove.co.uk)

3. IHT_Commentary.pdf (publishing.service.gov.uk)

Important Information

The contents of this article are for information purposes only and do not constitute advice or a personal recommendation. Investors are advised to seek professional advice before entering into any investment decisions. Please also note the value of investments and the income you get from them may fall as well as rise and there is no certainty that you will get back the amount of your original investment. You should also be aware that past performance may not be a reliable guide to future performance.