Article Intergenerational wealth planning provides opportunity

This information is based on our understanding of current taxation law and HMRC practice, which may change.

The immediate post war generation (often referred to as ‘baby boomers’) has typically benefitted from growth in the value of their homes over the years and accumulated pension wealth through a defined benefit pension.¹ As a result, an estimated £5.5 trillion will pass between the generations in the 30 year period from 2017 to 2047.²

This transfer of wealth between the generations could provide a real opportunity for advisers

An estimated 70% of this £5.5 trillion will come from residential property, which will commonly be sold to generate cash, as of 2017.³ Consequently, benefactors could require investment advice, leading to a potential increase in assets under your management. It also presents an opportunity to build relationships with the different generations and incorporate intergenerational wealth planning into your business model.

However, 65% of beneficiaries have indicated that they don’t intend to use their parents’ adviser.⁴ Additionally, research from Kings Court Trust in 2017, revealed that a quarter of inheritance beneficiaries, walk away from their parents' or grandparents' financial adviser due to a lack of relationship.⁵

These factors could lead to a retention risk but here are some suggestions to help you build relationships with the different generations, whilst fulfilling your existing client’s wishes on wealth transfer.

1. Form a relationship with your client’s beneficiaries

As an adviser you can engage in intergenerational wealth planning, which involves getting the various generations to meet and talk about their finances.

It can be a tricky situation to manage but as a trusted third party, you can act impartially and help to guide these often difficult discussions, by finding what works best for your client and their family. You can help by explaining what the role of a personal representative, attorney or trustee involves and what will happen to the client’s pension, investments and protection policies when they pass away.

Clients may be reserved about talking about their pensions and investments in front of their children and grandchildren. They might not be comfortable talking openly about inheritances, especially if there are complex family circumstances including second marriages. Or it could be awkward to discuss how a client wants their wealth to pass to the next generation, where one beneficiary is to benefit to the detriment of another.

By sharing an agenda and the objectives of the meeting first with your client and their beneficiaries, could help show them what they’ll get from that conversation and what, and if, they need to prepare anything beforehand. You could also consider creating a list of leading questions or examples to help make the conversation more meaningful. For example, if the client was no longer capable of looking after their finances, who would step in to support them? It’s likely that these conversations will become emotional and you’re there to help support and keep everyone on track to achieving the purpose of the meeting.

Whilst facilitating these conversations, it presents the opportunity to form a relationship with your client’s beneficiaries and gain insight into their own circumstances, values and aspirations. This could even lead you to alter the financial advice you provide to your existing clients.

2. Highlight the value of advice to the different generations

Engaging in these family meetings, could help you to highlight the value of a financial adviser to the next generation. In turn, you might retain the beneficiary as a future client and be able to provide future advice to them in relation to their own investments, pensions and protection needs.

The younger generation may not value face to face advice in the same way as older generations. You’ll have to give some consideration as to how you’re going to develop your future advice proposition to meet the needs of future generations, if it’s to appeal to them. You can read our article ‘What does Gen Z want from financial advice?’ if you’re looking to expand your reach to a younger audience.

3. The different types of transfer of wealth – meeting your clients wishes

Passing on wealth to those that matter most to your client can involve a number of different considerations. For example wills, powers of attorney, trusts and death benefit nominations. It’s important to review these to make sure that they’re still up to date and meet the client’s objectives. If the client hasn’t put these legal documents in place, you can help by explaining what will happen in the event they become incapacitated or pass away.

Make sure wills cover complex modern family circumstances

If a client doesn’t have a will in place, then they should consider making a will at their first opportunity. Where a client lacks mental capacity, the client’s attorney would have to apply to the court of protection to put a statutory will in place. As a result, this could lead to a possible loss of control for your client, as the attorney would not usually have the full knowledge as to how the donor would want their estate to devolve.

Modern family circumstances can be complex. If the client doesn’t have a will in place, then their assets will devolve in accordance with the intestacy rules. If a client is unmarried but living with a partner or if they have a step or foster child that they would like to benefit – then it’s important that the client makes a will to ensure that these parties can benefit, as they wouldn’t benefit under the intestacy rules. A client may want to include trust provisions within their will to cater for a minor child, to pass assets on to the next generation in a controlled fashion or to provide for a disabled beneficiary following their death.

Cover inheritance tax (IHT) planning with your client

These wealth transfers take place in a backdrop of rising IHT liabilities. HMRC received £2.9 billion in inheritance tax (IHT) receipts in the four month period from April to August 2022, which is an increase of £0.3 billion compared to the same period in the previous year.⁶ The IHT nil rate band is frozen at £325,000 and the residence nil rate band at £175,000 until April 2026, meaning more estates could potentially be liable to IHT in the future. ⁷

What if your client wants to transfer wealth during their lifetime to mitigate IHT?

If a client would like to pass wealth to the next generation during their lifetime, they will require IHT advice. There are a number of different IHT exemptions:

1. Small gifts exemption

Allows a client to make as many small gifts as they want during the tax year, of up to £250 per person, so long as these gifts aren’t covered by another exemption.

2. £3,000 annual IHT exemption

If it isn’t used in one tax year, it can be carried forward for one tax year only. If a married couple haven’t used their annual allowance in the previous tax year, then this would mean they could make a joint gift of £12,000 in the current tax year.

3. Normal expenditure out of income exemption

For example, does the client have surplus income, such as pension income, that they could gift year on year to make use of the normal expenditure out of income exemption? There are three conditions which the client has to satisfy for the exemption to apply:

• The gifts have to be out of income after tax.
• The gifts have to be regular in nature.
• The client still has to have enough income available to maintain their lifestyle following the gifts.

A client can document their intention to make these regular gifts in a letter to the ‘donee’ to provide evidence of their intention to make these regular gifts. They can also use a spreadsheet based on the template included in form IHT403 to keep a record of their income and expenditure year on year to help to justify the exemption applying to these regular gifts.

4. Gifts in consideration of marriage

Allows a client to make an exempt gift of £5,000 to their child when they’re getting married or £2,500 to a grandchild or £1,000 to others.

Discuss larger one off gifts earlier with your client, rather than later

A potentially exempt transfer (PET) is a gift from one individual to another or to the trustees of a bare trust or certain disabled trusts. A PET falls outside the donor’s IHT estate after seven years have passed. If an individual should lack mental capacity, an attorney in England and Wales would need authority from the Court of Protection to make substantial gifts or to do trust planning on their behalf. So it may be better to consider lifetime gifts whilst the donor is capable of making them and is likely to survive the seven year period following the gift. In Scotland, an attorney may be able to make a substantial gift depending on the provisions of the continuing power of attorney.

How is the IHT calculated on a PET?

David wants to make a gift of £400,000 to his 21 year old daughter, Elizabeth, to help her buy her first flat. He hasn’t made any previous gifts apart from using his annual £3,000 exemption for this year and last.

The IHT liability will reduce with taper relief:

Death occurs: Years 1-3

• IHT due: (400,000 – 325,000) x 40% x 100% = £30,000

Death occurs: Years 3-4

• IHT due: (400,000 – 325,000) x 40% x 80% = £24,000

Death occurs: Years 4-5

• IHT due: (400,000 – 325,000) x 40% x 60% = £18,000

Death occurs: Years 5-6

• IHT due: (400,000 – 325,000) x 40% x 40% = £12,000

Death occurs: Years 6-7

• IHT due: (400,000 – 325,000) x 40% x 20% = £6,000

What about using protection policies to provide the funds to pay the possible IHT bill?

David could consider taking out and paying for an own life gift intervivos policy in trust for Elizabeth to fund this reducing IHT liability. Alternatively, Elizabeth could take out and pay for a life of another policy on David’s life to meet the potential reducing IHT liability should David pass away within 7 years.

David should also consider taking out a level term policy for £130,000 (325,000 x 40%) in trust for the beneficiaries of his estate, as his nil rate band won’t be available to offset against his estate for 7 years.

Delivering against your client’s objectives and wishes

Having regular discussions with your clients to understand what they would like to happen to their assets when they pass away will help you meet their objectives.

Where possible, forming relationships with your client’s personal representations, attorney, business partners and beneficiaries can help you be the conduit for the transfer of wealth to the next generation. This will hopefully retain the relationship with these existing and prospective clients meaning that assets under your management are retained or increased.