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A generational wealth divide combined with an increase in people facing potential IHT bills is making intergenerational wealth planning an increasingly important consideration for families, but getting it right requires them to talk openly on subjects many try to avoid: money and death.
With the growth in asset values significantly outpacing income in recent decades, it has become harder for younger generations to climb the wealth ladder, including buying their own home. Only 36% of people born in the 1980s were homeowners by age 30, versus 55% of people born in the 70s and over 60% of those born in the 50s and 60s, according to the Institute for Fiscal Studies. Millennials are also the first UK 30-somethings to earn less than previous generations.
Meanwhile, rising property prices and a 15-year (and ongoing) freeze on the tax-free IHT threshold (£325,000, though this could rise by £175,000 if your estate includes a residential property that is passed to your children) mean the number of people facing an IHT bill continues to rise. There were 27,000 taxpaying IHT estates in the year 2020-21 compared with 15,600 in 2010-11.
Kevin Clare - Independent Financial Adviser“People assume they won't have to pay IHT because it was historically seen as a tax on the wealthy, but thresholds have been frozen a long time now, so more people are facing some kind of liability when a loved one dies,” says Kevin Clare, Independent Financial Adviser at Ascot Lloyd. “When I talk with clients about the amount of inheritance tax that may be due, it can often be quite a dramatic reaction.
“With probate, immediately there's a clock ticking because IHT is due six months after death. For many people that's the biggest issue, especially if the main asset is property. They are going to receive this tax bill and often they have no assets to pay it with. To be able to sell property probate is needed, but to obtain probate payment of the IHT liability is needed, a real catch 22.”
Depending on the extent of your wealth, IHT can present a considerable liability for your beneficiaries after you die – 40% on the value of your estate above the tax-free threshold. If you are widowed and your spouse left their whole estate to you, you also inherit their tax-free allowance which means yours could be up to £1 million if you pass on residential property to your children. However, this will diminish by £1 for every £2 your estate is worth more than £2 million.
Planning in advance is vital to protecting your financial legacy, as any assets gifted more than seven years before you die are exempt from inheritance tax. Savvy families might see this as a dual opportunity: minimising the IHT liability on your estate while also providing a helping hand to children and grandchildren who are struggling with things like getting on the property ladder, high mortgage costs or school fees. You also get to live to see the benefits of your inheritance.
“There are plenty of opportunities when it comes to intergenerational wealth planning but the earlier you plan the better and unfortunately it can be difficult to get families to talk about these kinds of sensitive subjects,” says Kevin. “Part of my job is trying to make them talk about it because it's so crucial. If you’re having those conversations, you can make decisions that save people a lot of tax in the long run and possibly also help loved ones when they need it the most. Talking about what happens when you go isn’t going to change the appointed time but it can help make dealing with the administration a lot easier and potentially avoid making HMRC one your largest beneficiaries.”
“Tax is complex in this country and it’s easy to make mistakes. For instance, a lot of wealthy people now have a significant value in pensions, which are well-known to be exempt from IHT but a lot of people don’t know that if you die after the age of 75 your beneficiaries will be taxed on any income they receive from your pension as earnings at their marginal rate of income tax.
“If I was a young lad and told I've got £800,000 of dad's pension coming to me, I wouldn’t hesitate to take it out immediately, yet it's probably the worst thing I could do. If family members are introduced to their parent’s financial adviser (preferably as part of the planning process), there's a much better chance they’ll be aware of the significant tax implications of doing that. People in this country are too often fearful of discussing both death and finances, including with family, which can have major consequences down the line.”
Failing to talk about money with family members can cause not only unnecessary financial liabilities after you die, and death remains one of life’s few certainties, but also additional stress at a time when they are already grieving. From being aware of administrative details like which banking, insurance and investment providers you use, to knowing where your Will is kept (and that it’s up to date), this kind of information will make dealing with your financial affairs after you die far easier for those who are left to do so.
It’s important that these records are in order and shared with the appropriate people, including your financial adviser, not only well before you die but also in the unfortunate event that your mental capacity is diminished. In particular, neglecting to appoint a lasting power of attorney could see your bank freeze your bank accounts and a court appointing somebody you wouldn’t have chosen yourself to make decisions on your behalf about your money and personal health.
“People typically come to the discussion of legacy planning when it's too late, especially when capacity is diminishing,” says Kevin. “If your last remaining parent dies you will know they had a house and maybe a second home and you might know who they banked with, but you probably don't know anything else nor where to look for it, unless they were proactive enough to tell you.
“At Ascot Lloyd we have a document called Your Folio which we encourage all clients to complete. It starts off with basic information like name and address, emergency numbers, who's your IFA, your bank, your doctor, where you keep your Will, who are your executors and power of attorney and when they were last updated. Then it lists assets like bank accounts, pensions and investments. Laying it all out in this simple way means when someone passes away or loses capacity you can immediately pick up that document and tell the widow or children that it's all in hand because you have the key information you require to guide them through the process. Equally this can be a place where you can note down utility provider account details so those can be contacted and increasingly as we live our lives online, what happens to your social media accounts too?”
“Crucially, I encourage all clients to also share the document with their family, particularly their intended executors, not just because it's a useful document but because it can often spark discussions they need to have about legacy and intergenerational wealth planning. The financial value of advice can be enormous but there is even greater value when you can help facilitate those delicate discussions in families. And when the worst does happen, the reassurance that comes with knowing that the financial side is being taken care of by a professional that you trust is worth its weight in gold.”
If you or your loved ones require any support in intergenerational wealth and legacy planning, please contact your Ascot Lloyd Independent Financial Adviser to discuss.
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