What Is the "Great Wealth Transfer" and How Can Families Prepare?
Over the next three decades, the UK will experience an unprecedented shift in wealth distribution, often known as the "Great Wealth Transfer." Trillions of pounds will be transferred from the baby boomer generation (those born between 1946 and 1964) to younger generations, including Generation X and millennials – with wide-ranging implications for individuals, families, and the broader economy.
Understanding the Great Wealth Transfer
The slightly grandiose term may be off-putting, and many who don’t consider themselves wealthy might think it doesn’t apply to them or their families. The fact is, the baby boomer generation has accumulated substantial wealth – benefiting from factors like rising property values, robust stock market performance, and generous pension schemes.
As this group ages, their wealth is set to pass to heirs, charities, and other beneficiaries. This transfer is not merely a financial event – they will also pass down their values, aspirations, and family legacies.
Implications for inheritance and taxation
One of the critical considerations in transferring wealth is inheritance tax (IHT). Estates valued above a certain threshold are subject to IHT, which can significantly reduce the amount you can pass on to beneficiaries. The IHT threshold now is £325,000, a limit that doesn’t apply if you are leaving assets to your spouse, and it can be increased to £500,000 if you give away your home to your children or grandchildren.
Recent policy changes, however, have raised fresh concerns. For instance, the UK Budget in October 2024 introduced an extension of IHT to unspent pension pots from April 2027. This could potentially lead to "double taxation" on inherited pensions, as they would attract both IHT and income tax.
This change underscores the importance of proactive estate planning to mitigate tax liabilities.
How to prepare – strategies for the Great Wealth Transfer
- Early and open communication
A study we commissioned (and what you may intuitively suspect) found that it’s best to initiate conversations about wealth transfer within your family sooner rather than later. Discussing inheritance intentions, financial goals, and personal values can prevent misunderstandings and align expectations among family members.
For example, we found that while 66% of parents believe their children have a clear understanding of their plans, only 39% of young adults agree – so it’s worth starting a dialogue to anticipate any disconnect between the generations.
- Comprehensive estate planning
Developing a detailed estate plan is crucial. This includes drafting a will, establishing trusts, ensuring you have appropriate life insurance and appointing executors to manage your estate. A well-structured estate plan ensures that your assets are distributed according to your wishes and can help minimise tax liabilities. Legal professionals experienced in estate planning can provide guidance that is appropriate for your circumstances.
- Tax-efficient gifting
Consider utilising tax-free gifting allowances to transfer wealth during your lifetime. Individuals can gift up to £3,000 per year without incurring IHT. Additionally, making regular gifts from surplus income can be immediately exempt from IHT, provided they do not affect your standard of living.
Larger sums can also be gifted, provided you live for seven years after the gift, with the IHT penalty declining from year three for each of those subsequent years until it reaches zero. Gifting wealth to your children or grandchildren (or charities) in these ways will reduce the value of your estate subject to IHT.
- Consider establishing a trust
Setting up a trust can offer control over how and when beneficiaries receive assets. Trusts can be tailored to specific needs, such as funding education or managing assets for minors. However, they come with complex rules and potential costs, so it's essential to seek professional advice to ensure they align with your objectives and comply with legal requirements.
- Financial education for beneficiaries
Linked to open communication is the imperative to prepare heirs to manage inherited wealth responsibly. This may involve providing financial education – with older adults potentially sharing their experiences – and involving them in financial planning discussions.
Without proper preparation, beneficiaries may struggle to preserve and grow the assets they receive. This can potentially lead to the dissipation of wealth within a few generations, a situation that occurs more often than you might think, even among wealthy families. You may be familiar with the phrase, “from shirtsleeves to shirtsleeves in three generations”. This means that wealth accumulated by one generation is often lost by the third generation.
A study reported in the FT (behind paywall) highlighted that in more than two out of three cases, family wealth fails to outlive the generation following the one that created it, and 90% of the time the assets are exhausted before the end of the third generation. Even if this outcome is not always empirically assured, there is little doubt that hanging onto wealth through generations requires considerable forethought and adept planning.
- Assess whether you need professional financial advice
Experienced financial advisers can provide personalised strategies to align with your family's goals. They can help you to ensure your assets are effectively managed and invested now – maximising their growth potential – and you are then well placed to distribute your wealth efficiently.
Maintaining an effective financial plan, especially across generations, can have many moving parts. Even if you are financially savvy, it’s best to ensure you make the most of your allowances – and you know what mistakes to avoid.
There are a few times in life when financial advice is broadly advisable; being prepared for the Great Wealth Transfer is one of those occasions. You can book a no-obligation call with one of our team here to help you meet your objectives.
- Review your plans regularly
Life circumstances and tax laws can change over time. Regularly reviewing and updating your estate plan ensures it remains aligned with current laws and your evolving intentions. This proactive approach can prevent unintended consequences and help you adapt to new opportunities for tax efficiency. Further, you may want to check, for example, if you are taking enough risk to achieve your goals.
A Financial MOT could be ideal to help you assess your potential outcomes using powerful tools, with personalised information and guidance so you can better understand how your choices could impact your financial outcome. Sign up here to get a clearer picture of your finances.
Conclusion
The Great Wealth Transfer presents both opportunities and challenges for UK families. Proactive planning, open communication, and professional guidance are essential to navigate this complex landscape effectively.
Thoughtful strategies, fairly implemented, will help you ensure that your wealth benefits future generations as intended – while minimising potential tax liabilities and preserving family harmony.
If you want to take the first step towards safeguarding your family’s future, please get in touch.
Please note, the value of your investments can go down as well as up.
Netwealth offers advice restricted solely to our services. We do not consider the whole of the market, nor offer advice in relation to tax compliance, insurance products, or the transfer of defined benefit pensions.
