Intergenerational wealth transfer: it’s all the rage

• 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 to consider.

Mind the generation gap

According to the Resolution Foundation’s Wealth and Assets Survey, 60-somethings are the wealthiest age group, with average wealth equivalent to £332,000. Many are at the end of a career and have had time to accumulate savings, pensions and property. By contrast, millennials (people in their twenties and thirties) are the first generation in history to be less well-off than their parents. 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.

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.

Read more: Can paying your grandchildren’s school fees be a good way to reduce potential inheritance tax liabilities?

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.

Read more: A guide to inheritance tax

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.

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, it has also been possible for parents to pass on a home worth up to £1 million (£500,000 for each parent) 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”.

Since 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.

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.

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 which you no longer benefit from.

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.

Read more: The role of trusts in estate planning

Communication is key

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 your reasons for skipping a generation, if this is what you’re planning to do, to avoid misunderstandings or upsets that could lead to legal challenges.

And you’re not alone.

In our inaugural Family and Finances report, we surveyed over 1,000 individuals over the age of 60 to get a clear picture of how people are planning to pass wealth down the generations. We found that more than half of those surveyed (53%) plan to pass on their assets to their grandchildren on their death, while 12% say they plan to do so during their lifetime.

Yet, an overwhelming majority at 78% have no estate planning strategy in place which highlights the gap in financial planning when it comes to passing on wealth.

Family conversations around managing wealth in old age and passing it on to the next generation have never been so important. Over £5.5 trillion will move hands between generations in the UK between now and 2055, peaking in 2035. Having a plan in place on how to handle this efficiently is crucial to pass wealth on smoothly, avoid family disputes and manage the tax bill.

Find out more in our Family and Finances Report.

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.