What is intergenerational wealth planning and why is it so important?

Everyone wants a secure financial future, not only for themselves but for their parents, children, grandchildren, and other family members. Intergenerational wealth planning is a way to preserve wealth and for family to help other members to achieve their financial goals in the short and long-term. In this article we explain in more detail what intergenerational wealth planning is, how it can work, and why it’s so important.

• What is intergenerational wealth planning?
• Why is planning for intergenerational wealth so important?
• Why more families need to consider intergenerational wealth planning
• How do I build intergenerational wealth?
• Intergenerational wealth – tips and summary

What is intergenerational wealth planning?

Intergenerational wealth planning can be when different generations of the same family get together and plan their shared financial future. Most often, though, it is the grandparents or parents planning the best and most efficient method of passing down wealth through generations with their financial adviser. Intergenerational wealth planning can also be an effective strategy to help meet specific goals, such as paying for school fees, or supporting more vulnerable family members.

While it can be difficult for families to talk about money or for individuals to reveal their financial status, the long-term benefits of doing so can be significant. With the right advice, combined with a willingness to share details of savings and investments, pensions, property and business interests, different generations can create and preserve wealth much more effectively than family members can do so alone.

Why is planning for intergenerational wealth so important?

Planning for intergenerational wealth can help family members achieve a wide range of goals. It can help reduce tax when money or assets pass from one generation to another. It can help ensure family members begin to accumulate wealth as early as possible. It can also help to ensure older family members maintain their living standards during retirement, while setting up younger family members for future financial security. Perhaps more importantly, though, getting the opportunity to see family enjoy the wealth passed on at the time it is gifted can be seen as a benefit.

Modern family structures tend to be more complex than they were in the past; blended families have become much more common as attitudes to divorce changed. Factors like these need to be taken into account: for example, if someone inherits wealth from their parents and subsequently gets divorced, the ex-spouse may be able to lay claim to some of this wealth if a plan to preserve it hasn’t been put in place. For this reason, as financial planners, we typically work in conjunction with accountants and family solicitors.

Why more families need to consider intergenerational wealth planning

In recent years, more and more estates are becoming subject to Inheritance Tax (IHT). Since the 2009/10 tax year, when IHT receipts stood at nearly £2.4 billion, the amount raised by IHT has risen every year. During 2021/22, IHT netted the government £6.1 billion, an increase on the previous year of 14%.

This is partly because the threshold for paying IHT has remained unchanged at £325,000 since 2009, and it will stay at this level until at least April 2028. Inflation means that the threshold decreases in real terms each year. Indeed, the Bank of England calculates that £325,000 in 2009 would have been worth £473,784.72 by October 2022.

Families also have to contend with decreasing tax-free thresholds for Capital Gains Tax. The personal threshold  for the 2023/24 tax year is £6,000, and it will drop to £3,000 in April 2024. This will have implications for anyone disposing of capital assets such as property, land, or shares, to pass on wealth to the next generation.

How do I build intergenerational wealth?

If you want to consider how you can preserve and build intergenerational wealth you will firstly need to get the agreement of all involved family members. Family members will need to be open about their financial affairs, sharing information about income, savings, assets, pensions, and more.

Once you have broadly agreed your shared financial goals, the most important thing you should do is consult an independent financial planner. Good financial advisers have the knowledge and skills to create strategies that will help you preserve wealth, plan for the future, and reduce the tax you pay when money or assets change hands.

To give you an insight into some of the strategies a financial planner might recommend, we’ve put together this list of common recommendations.

1. Start planning early

The earlier you start planning, the more options that will be open to you. Firstly, younger generations will have more time to implement wealth creation strategies, such as building up savings and investment portfolios. Secondly, the earlier you put in place a plan for older generations to pass on wealth, the easier it will be to limit IHT liabilities (see the next recommendation for details).

2. Make use of IHT exemptions

A key method of passing on wealth to younger generations is by making use of Inheritance Tax exemptions. In particular, if you pass on money, personal goods, property, land, stocks or shares – and you live for a further seven years – then no IHT is payable on the gift. If you live for less than seven years, tax is payable when the gifts exceed the IHT threshold on the following tapered scale.

• 0-3 years: 40% (i.e. the standard rate of IHT)
• 3-4 years: 32%
• 4-5 years: 24%
• 5-6 years: 16%
• 6-7 years: 8%
• 7+ years: 0%

It’s also important to talk to a financial planner about other reliefs. For example, if you give away your home to your children, stepchildren, or adopted / fostered children, you can increase your IHT threshold from £325,000 to £500,000. In addition, you can pass on any unused threshold to your spouse or civil partner, potentially increasing their personal threshold to £650,000.

3. Consider children’s pensions

You’re never too young to start saving for a pension. As a result, many people are turning to children’s pensions to help ensure that younger generations can enjoy a comfortable retirement. These pensions are called Junior SIPPs and, while they can only be set up by a parent or legal guardian, anyone (such as a grandparent) is allowed to make contributions. As of 2023/24, you could qualify for tax relief on £3,600 of contributions each year. When the child turns 18, they take control of the pension and will qualify for tax relief on up to 100% of their earnings (subject to the Annual Allowance, which is currently £60,000). They will not be able to take any money from their pension until they are at least 57 (the minimum age as of 2028). For more information, see our guide to children’s pensions.

4. Look into other ways of passing money to children

There are other ways of passing money to the youngest generation, some of which can also help them become confident managers of their own money. These include children’s savings accounts, Junior ISAs (which allow tax-free savings of £9,000 annually) and NS&I Premium Bonds.

5. Passing on pensions

It’s a good idea to ask a financial planner for pensions advice, whether you have a defined benefit pension (including ‘final salary’ and ‘career average’ schemes) or a defined contribution pension (including workplace and personal pensions). Different schemes have different rules about passing on your pension when you die. Generally speaking, many schemes will pay out a proportion of the pension or a lump sum to your beneficiaries, depending on how old you are when you die.

You may find there are a number of options in terms of where your pension money is invested, including shares, bonds, and commercial property. A financial planner can help you to choose the most appropriate investment, depending on your attitude to investment risk.

6. Trusts

In some circumstances, trusts can be a good way of reducing Inheritance Tax liability. For example, you could set up a trust for a child or grandchild, which they can access when they reach a specified age. Trusts can also be used to support a vulnerable family member. However, it’s worth noting that while a financial adviser can recommend a trust if appropriate, you will need a solicitor to set one up.

7. Use family investment companies

Often, you can use family investment companies to reduce your tax liabilities, maintain control of assets, and tax-efficiently pass shares to future generations. A normal company structure will not be suitable; a lot of prior planning goes into the articles of association and shareholder agreements, so we would strongly recommend taking financial advice if this is something you are considering.

Intergenerational wealth – tips and summary

As you’ve seen, intergenerational wealth planning can deliver financial benefits for your extended family and help you to focus on your financial goals while developing a plan for achieving them. It can help you pass on wealth in tax-efficient ways, help younger generations attain financial goals and give children a good head-start in life – all while maintaining lifestyle standards for older generations.

However, to make intergenerational wealth planning work for the whole family, it’s important to start as early as possible and get advice from an expert financial planner. Remember, it’s also wise to review your plans on a regular basis: tax rules change, meaning you may need to adjust your plans in future years.

If you’d like help with intergenerational wealth planning, our team of independent financial advisers will be able to help you agree on your goals, and put together a plan to achieve them. For further information, contact us on 01603 967967.

Please note, the value of investments and any income from them can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future. The value of tax reliefs depends on individual circumstances. Tax laws can change.

None of the information in this article represents a recommendation about how to plan for intergenerational wealth.