What the “greatest wealth transfer in UK history” means for you

Category: News

Barclays report that more than 80% of household wealth in the UK is currently held by the over-45s. Over the next 30 years, this money will be transferred between generations, in what FT Adviser describes as “the greatest wealth transfer in UK history”.

The value of this wealth transfer, most likely through gifting and inheritance, is estimated at around £5.5 trillion and could present challenges for those giving and receiving wealth, either during life or on death.

Keeping reading to find out how the great wealth transfer has come about, and how it could affect you and your family.

Life is more expensive for younger generations

Millennials are the first generation in over a century to be worse off than their parents. The high cost of living, rising house prices, and stagnant wage growth – even before the coronavirus pandemic – have left younger generations struggling.

Both millennials and Generation Z have additional expenses to consider too. University education, for example, between the 1960s and 1990s, was effectively free. Now, tuition fees and loans mean graduates can be £30,000 or more in debt before they even enter the professional world.

Final salary pension schemes too, which provided a gold-plated retirement income based on years of service and salary, are now almost extinct. They have been replaced by less certain, employee-funded defined contribution schemes.

Rising house prices have boosted the wealth of older homeowners

According to the Office for National Statistics (ONS), house prices increased by an average of 13.2% in the 12 months to June 2021. The report confirms an average house price of over £265,000.

This is nearly 14 times the average cost in 1980, according to Good Move, when a home would set you back just £19,273. While rising house prices are great news for homeowners, the first rung of the housing ladder looks increasingly unattainable for younger generations.

You might be looking to help your children or grandchildren onto the property ladder, but this isn’t always as simple as it might seem.

There are many rules surrounding gifting and inheritance, so planning is key

You may be looking to gift money while you are still alive. This has several benefits:

  • Your children receive the money when they really need it
  • You’re able to see the outcome of your gifts
  • Gifting is tax-free up to the annual amount of £3,000
  • Gifting to your spouse or a charity is tax-free, no matter the value.

Gifting is also free of Inheritance Tax (IHT) if you survive for seven years after the gift is made. Even if you do pass away within seven years, the amount of IHT payable on the gift reduces the longer you survive.

According to Statista, over £5.3 billion was taken in IHT during the 2020/21 tax year. It is never too early to start thinking about tax-efficient estate planning.

Your liability for IHT depends on whether the value of your estate exceeds the tax threshold, known as the “nil-rate band”. The current nil-rate band is £325,000, although leaving your property to your children or grandchildren increases this to £500,000. There is no tax to pay on anything you leave to your spouse.

Managing your IHT liability can be complex – and costly, if not done right – so be sure to contact us if you’re looking to pass wealth onto the next generation tax-efficiently.

Understand the importance of clear communication

As millennials and Gen Z face financial hardship in the wake of the coronavirus pandemic, often, it is the “Bank of Mum and Dad” (BOMAD) that steps in.

If you can afford to support your grown-up children, that’s great. But be sure to communicate exactly what you are gifting or loaning, and the parameters of the arrangement.

Lending a child money to cover rent during lockdown is one thing. Communicating that this is a loan and that you anticipate the rent money back in the future is simple. Helping with a deposit toward a first home, though, could be a lot more complicated. This is especially true where your child is moving in with a partner.

Communicate clearly whether the financial help you give is a gift or a loan, ensure the terms of the loan are clear – and written down – and also seek legal advice to find out what would happen to your money should your child’s relationship break down.

This will help your child to budget more effectively, will save uncomfortable conversations later on, and protect your family and your money. While talking about money might be difficult, communication is key.

The value of inheritance could change someone’s life

Whether you are giving or receiving an inheritance, there is a lot to think about.

As the person giving the money, you’ll need to be sure that your gifts don’t leave you short on money, either now, or in later life. A good financial plan that covers all eventualities and contingencies will help here, so be sure to speak to us.

Once you’ve made a gift or loan, do all you can to educate the recipient to ensure your money is used most effectively and efficiently. This might mean clearing a high-interest debt and encouraging them to pay their future selves first through savings or a long-term investment.

Remember that communication is key. Speaking to qualified professionals – and getting your children involved with these discussions – can help to make expectations clear and save difficulties later on.

Get in touch

Understanding the rules around inheritance and gifting is key to navigating intergenerational wealth transfers successfully. Talk to us and we can help you manage your inheritance.

Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss any aspect of your estate.

Please note

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.