As the average age of the population continues to increase, it’s not uncommon for families to stretch across four generations. Thanks to advances in medicine, people are working and living longer. And whilst having more time to spend with your loved ones is a wonderful thing, concerns over financing and supporting our extended retirement are not going away.
Traditionally parents would bequeath their assets to their surviving spouse and subsequently their children. But, as we live longer, there are increasing opportunities to use intergenerational financial planning which includes grandchildren and great grandchildren too.
A number of societal factors have played a role in widening the gap between the financial wealth of the younger and older generations. Baby boomers are usually considered the wealthiest of today’s surviving family members – enjoying final salary pensions and an average three-fold UK house price increase over the past 40 years. They are also the first to enjoy longer retirement.
Conversely, millennials, alongside gen X and Y, are facing rising house prices, student debt of up to £50,000 and an uncertain economic future, forcing many to adopt a ‘live for today’ attitude.
But with life expectancy rates predicted to rise, the need to plan ahead and for the longer term is proving more important than ever before.
Traditionally, when it came to retirement, people would be considering the level of income they wanted to take or perhaps making an extravagant purchase such as a holiday home or a boat. Now, parents are focusing more on how they can pass on their wealth to the children whilst they are still alive, at the same time as leaving enough money to carry them comfortably through retirement.
According to a report published by the Resolution Foundation, less than a third of millennials owned their own home at the age of 30, compared to 55 percent of baby boomers at the same age. This statistic is further supported by research by Legal and General which revealed that parents, family or friends were the equivalent of a £5.7bn mortgage lender in 2018 to help loved ones onto the property ladder, assisting in the purchase of almost 317,000 homes (Source: Bank of Mum and Dad Report 2018).
In a separate report by the Resolution Foundation, it was found that the amount of money passed on through inheritance each year has doubled over the past two decades and will more than double again over the next twenty years as baby boomers pass away. So how do parents, grandparents and great grandparents work together to pass on this wealth in the most tax-efficient way possible?
If your children are in their forties, then you may be comfortable with handing them money, which can be done using your small and annual gift allowances. Larger gifts can also be made but will typically take seven years to fully fall outside of your taxable estate. If time is of the essence, then loaning monies or putting your own name on the deeds of a property purchase could prove more viable, however this could also make you liable for the higher rate of stamp duty on second home purchases together with capital gains tax should the property to be sold. More information on gifting can be found here.
Trusts are another viable alternative for passing on wealth but, as with gifting, once the assets are in trust you also hand over ownership of those assets. If you are looking at younger beneficiaries, or if you’d prefer to retain control of your capital, then a discretionary trust maybe a solution, as you can build in certain decisions about how the assets are distributed and when. For more information on the different types of trust, click here.
Investing in shares that qualify for Business Property Relief, (BPR) and holding them for two years, can also receive up to 100% IHT relief. For more information click here.
For those who do not, or cannot, pass on property assets during their own lifetime, it’s wise to make best use of the residence nil rate band.
Following years of property price increases, many families have unexpectedly fallen into the realms of IHT. In response to this concern, in April 2017 the government introduced the RNRB, which provided homeowners with an additional £100,000 allowance before they are subject to IHT. This allowance increased by £25,000 each year until it reached the full £175,000 in April 2020. Further details can be found here.
Whilst only direct descendants qualify for RNRB, married couples leaving their assets to each other can transfer their RNRB allowance to the surviving spouse, thus doubling their tax-free threshold.
However, whilst the threshold has increased for many families, the government predicts IHT payments to rise over the next few years, largely due to rising house prices.
Another option which can limit access to beneficiaries is third-party pension contributions, which have become increasingly popular following the new pensions freedoms. Flexible pensions also enable tax efficient passing of wealth between generations – if the pension scheme member dies before they turn 75, their nominated beneficiaries will not have to pay tax on their withdrawals, whether as an income or a lump sum. If they die after turning 75, pension assets do become taxable but only at the rate of income of the recipient, not the full 40%.
Whilst is has become increasingly common for children to look to their older family members for financial assistance, the key to intergenerational financial planning is striking the right balance between providing for everyone in your family at the various stages of their life in the most tax efficient manner possible.
If you would like to discuss the implications of IHT, please contact your Finura advisor.
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The RNRB, which is designed to protect the family home from inheritance tax (IHT), was £100,000 for deaths occurring in tax year 2016/17 and has been phased in gradually over four tax years at a rate of £25,000 per annum until it reached £175,000 in tax year 2020/21.
Traditionally parents would bequeath their assets to their surviving spouse and subsequently their children. But, as we live longer, there are increasing opportunities to use intergeneration financial planning which includes grandchildren and great grandchildren too.