Focus on
Intergenerational
wealth management
It has normally been the way that wealth is passed from one generation to the next. Intergenerational wealth management challenges this assumption
It focuses on how families can use their combined wealth more collaboratively to aid each other during their lifetimes. And it provides legitimate estate planning and tax mitigation opportunities, as well as often much-needed assistance with the financial burden of everyday life.
Changing attitudes to estate planning and wealth transfer
There are clear signs that people are rethinking their attitudes to estate planning and their willingness to consider lifetime transfers. The shift in thinking was already in motion, but it accelerated during the pandemic and its aftermath – as with so many social trends.
According to research from Charles Stanley, 82% of financial advisers reported a leap in client interest in the intergenerational transfer of wealth between November 2020 and November 2021, and 77% said that estate planning had become more important to clients.
Fundamentally, when you leave money when you die you will never get to see the impact of that on your loved ones’ lives. So, making gifts during your lifetime and helping to change lives makes sense.
The drivers of changing attitudes to wealth transfer
Baby boomers, the richest generation in history, are starting to hand down wealth to the next generations and increasingly understand the planning opportunities this presents. More immediately, the real cost of IHT is rising. Fiscal drag – increasing the impact of tax in real terms by freezing rate bands and allowances – has impacted inheritance tax more than most other taxes.
The nil rate band has remained at £325,000 since April 2009. If its value had been kept in line with CPI over that period, by the start of the 2022/23 tax year (April 2022) the nil rate band would now be worth over £450,000 – nearly 40% extra. And some assets like houses and shares have increased in value by much more.
And current rates of inflation are expected to make the burden of IHT even more eye watering as, according to the government’s Office of Budget Responsibility, the nil rate band will be frozen at its current level until 2025/26.
The concept of gifting has been a big feature for my wife and I for our children. We’ve passed on and avoided being taxed on a fairly significant chunk of our wealth to our family.
The long-term challenges for the main IHT planning strategies
Two well-established planning opportunities offer what looks like an irresistible combination: the assets are free of inheritance tax, but remain in your estate and are available to draw on if needed. These are registered pensions and assets like AIM shares that qualify for business assets relief.
But it is important to state that these privileges may not necessarily last in the longer term. Even though the current government seems likely to hold off taking action to limit their effectiveness, it seems quite probable that a change of government might lead to their disappearance, as many people recognise.
Therefore, we recommend the use of these strategies in the many circumstances in which they are appropriate, but make clear the possibility of their disappearance at some point, considering the government’s hunger for additional revenue.
The ways to transfer your wealth
There are a number of different ways to transfer wealth. And it’s important to note that tax planning effectiveness is only one consideration.
Outright gifts of capital
These are often the simplest and, tax wise, most effective approaches to transferring wealth. But you may not feel able to make sufficient gifts without endangering your standard of living, which is understandable but may well not be the case. And, of course, the recipients may not be ready or able to accept the transfer and make good use of it.
Gifts into trust
These allow more control over the destination and uses of any assets, but they can involve extra complexity and expense and, in some instances, risk. Here, specialist help is likely to be necessary.
Gifts of a series of capital or income gifts
These may be appropriate, but it should be noted that they are less effective in the event of premature death.
Loans on which the borrowers pay interest (or not)
These can be effective ways for you to retain a degree of control over the assets you make available to younger relatives. These can be retained as loans or cancelled from time to time.
Property
It may be the largest asset that many people have, but there are highly effective anti-avoidance provisions that stop people getting a tax advantage from giving away their homes while still living in them. Equity release is one possible and partial answer to this issue.
The use of Business Relief investments
These can be effective end of life planning strategies, but the two-year ownership condition may make them unsuitable for death-bed situations.