According to FT Adviser, £5.5 trillion of wealth is expected to be passed on to younger generations over the next three decades.
When you consider increases in property prices and generous final salary pensions that were available until recently, it’s small surprise that the figure’s so high. It’s a sharp contrast to the struggles younger people seem to be experiencing getting onto the property ladder and saving for retirement.
Consequently, there are many parents and grandparents keen to help younger generations financially. But what’s the best way to do it?
Intergenerational planning could help ensure you pass your wealth on as tax-efficiently as possible while maintaining more control over how your money reaches younger generations. Read on to find out more.
1. Intergenerational planning gives you more control
Intergenerational planning means you create a roadmap outlining how you will pass your wealth on to younger members of the family. One of the biggest advantages of doing this is that you can gift your estate while you are still alive, allowing you more control.
One time this might be important is if you are concerned a younger member of your family may not use a large sum responsibly. For example, you may fear they will use it to buy an expensive sports car instead of a deposit on a house.
Having a roadmap means you can discuss with them how you would like the funds to be used, and decide whether to pass money on now or in the future, when you feel it might be used more responsibly.
It also means you can include a financial planner in conversations with loved ones, and in creating the strategy. They can help explain options available to beneficiaries, potential future benefits and possible tax implications, while ensuring your plans are as efficient and effective as possible.
2. You could pass money on when the beneficiaries need it most
Gifting to loved ones at a younger age means the money you provide could be of more help to them.
If you pass money to your children through inheritance when you die, it’s probable their offspring will have left home and their mortgage is paid off. In other words, your children may not feel the benefit of the money you leave them.
Gifting it to them earlier might mean they receive it at a time when they have a mortgage and family to support, meaning the money provides more benefit.
3. Intergenerational planning could negate any Inheritance Tax (IHT) liability
As your strategy can start long before you die, you can use it as part of an IHT mitigation plan. IHT is typically charged at 40%, meaning it can significantly reduce the amount you leave to loved ones when you die.
It’s charged on the amount in your estate above the nil-rate band (NRB). Currently, it’s £325,000 per person or £650,000 if you’re married.
Subject to certain stipulations, you may also take advantage of the residence nil-rate band (RNRB), which boosts a single person’s allowance to £500,000 and a married couple’s to £1 million if you leave your home to children or grandchildren.
In March 2021, the chancellor froze your NRB and RNRB until 2026, meaning that if your assets, investments, or property continue to rise in value your estate could be liable to a higher IHT charge.
One way you could deal with this situation would be to reduce your wealth down to a level that’s within your nil-rate band. This can be incorporated into your strategy
4. A key part of intergenerational planning is to start early.
When creating your strategy, the sooner you start the better. To demonstrate this, let’s consider reducing your estate back down to being within your NRB.
One way you could do this is using potentially exempt transfers (PET), which allows you to gift any amount to anyone you choose. The only condition is that you must then live for seven years afterwards for the gift to fall outside of your estate.
If you do not, all or part of the gift falls back into your estate, depending on how long you live. As a result, it could be liable to IHT.
With this in mind, the earlier you make a PET the higher the chance of success. Someone who gifts wealth aged 65 is much more likely to be successful than someone who does it aged 85.
5. Starting early means you can do more with other gifts
Every year HM Revenue and Customs allows you to make certain gifts from out of your estate, which include:
- A total of £3,000 that can be given to an individual or split between many people.
- An unlimited number of gifts of up to £250 each, from normal income.
- A £1,000 wedding gift to anyone, or a £2,500 wedding gift to grandchildren. You can also give a £5,000 wedding gift to your children.
- Regular gifts of any amount as long as they’re not from capital and do not affect your standard of living.
Like the PET, the earlier you start to use the gifts the more years you can use them, allowing you to potentially reduce IHT liability further.
Always speak with a financial planner
While gifting earlier has its advantages, care must be taken. The most important thing is to ensure you have enough to maintain your standard of living while you’re alive.
Speaking with a financial planner can help ensure this, providing you with the confidence to make gifts safe in the knowledge your financial future is secure.
Get in touch
If you would like to discuss intergenerational planning, potential IHT liability, or your finances in general, please get in touch by email on email@example.com or by calling us on 01785 876222.
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.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.