PASSING ON MY WEALTH

Intergenerational wealth transfer: it’s all the rage

  • 27 July 2020
  • 15 minutes
  • There is an intergenerational divide as wealth continues to skew towards older generations.

  • Many grandparents could help younger generations now rather than wait until they die.

  • But if you are thinking of helping your loved ones here are some things you should consider.

Mind the generation gap

According to figures from Saga, those in their sixties have average household wealth of £83,105. They’re the wealthiest of any group over the age of 50 [1]. Many have benefited from the rise in property prices. By contrast, millennials (people in their twenties and thirties) are the first generation in history to be less well-off than their parents [2]. If they own no property, their rent is likely to take up at least half of their income, leaving little left to save. And by the time their parents die, they will, on average, be 61 themselves [3].

The intergenerational wealth divide means that more and more families are thinking of passing on wealth while they are still alive as well as leaving cash, assets and property to family in their will.

Such a move can provide much-needed support to children who are funding school and university fees and who are facing a pensions funding gap, and to grandchildren who are battling to get on the housing ladder.

It also means that those gifting their wealth can enjoy watching their loved ones benefit from it.

Bridging the divide

If you’re thinking of helping your family in this way, make sure you understand the ways in which you can pass on wealth in the most tax efficient manner. Getting this right can reduce the amount that HM Revenue & Customs (HMRC) can claim when it eventually comes to assessing your estate’s inheritance tax (IHT) liability.

People in their twenties and thirties are the first generation in history to be less well-off than their parents

Inheritance tax in figures

During the 2018-19 tax year, HM Revenue & Customs (HMRC) collected a record £5.4 billion [1], marking a 3% rise (equating to £166 million) on the previous year [2].

Receipts have been rising since 2009-10, and the number of people paying IHT is rising too. Soaring property prices has been one of the biggest causes behind IHT payment increases, according to HMRC. London and the South East, where property prices are among the highest, account for 48% of IHT charged across the UK [3].

Inheritance tax: the nil-rate band

IHT is charged at 40% on the value of estates above £325,000 - known as the nil-rate band. This threshold has remained fixed at £325,000 since 2009, and is also an important factor. Had the allowance increased with inflation, individuals would now be able to pass on £428,000 tax-free (£856,000 for couples) [4].

Married couples and civil partners can inherit their spouse's entire estate tax free. They can also now add any of their spouse’s unused IHT allowance to their own to increase the potential nil-rate band of their estate.

If none of the first spouse’s tax free allowance is claimed, this means a couple can effectively pass on £650,000 before inheritance tax has to be considered.

A special exemption: your main residence

Following reforms announced by former chancellor George Osborne in 2015[5] , it will also be possible for parents to pass on a home worth up to £1 million to their children tax free from April 2020. This is known as the residence nil rate band.

To be eligible for the residence nil rate band the property must be your main home (i.e. it does not apply to buy-to-lets or holiday homes) and only applies where you are leaving your property to “direct descendants”.

After April 2020, in addition to the normal nil rate band of £325,000, the estate of each spouse can claim an additional £175,000. That’s an additional £350,000 on top of the existing £650,000.

For the remainder of the 2019-20 tax year the allowance is £150,000 each or £300,000 in total. That’s still means a couple can leave up to £950,000 free of inheritance tax.

However, if a couple’s estate is worth more than £2 million the additional nil rate band tapers back down by £1 for every £2 above this limit.

This is currently charged at 40% on the value of estates above £325,000 - known as the nil-rate band – with a special exemption for main residences that can take this allowance to £950,000 (£1 million from April 2020).

It is possible to gift cash or assets under the Potentially Exempt Transfers (PET) rules. You can give away all types of assets, including cash, chattels (which means personal items), property, and shares.

Tax treatment depends on the individual circumstances of each client and may be subject to change in the future.

For these to be free of inheritance tax you need to survive for seven years after making the gift and it must be an outright gift from which you can no longer benefit.

Read more: Inheritance tax: a complex labyrinth

Asset protection

But once you give up control of the assets, you cease to have any say in what happens to them and you might want to make sure the assets don’t end up outside of the immediate family. This can happen as the result of a divorce, or where the widow or widower of a family member enters into a subsequent marriage.

If this is something you’re afraid of, you could consider talking to a professional adviser about setting up a trust to retain a degree of arms-length control. Getting advice on the timing of transferring assets could also help you decide what’s best for you and your family.

Communication is key

Experts are unanimous that discussions with the extended family are crucial when it comes to passing on your wealth and/or assets. It’s particularly important your family understands the reasons for skipping a generation to avoid misunderstandings or upsets that could lead to legal challenges.

Conclusion

Grandparents could transform the lives of millions of millennials but the rules around financially helping your loved ones are complex.

Taking professional advice could help you explore all the options available and help you create a succession plan best suited to you and your family’s circumstances.

It could help you and your family make the right decisions in terms of being tax efficient, as well as gifting appropriate levels of wealth so you don’t give away money or assets you might need yourself in the years to come.

Important information

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.

Fees and charges apply at Schroders Personal Wealth.

In preparing this article we have used third party sources which we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

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