The Great Wealth Transfer

It is predicted that £5.5 trillion of assets will be passed down between 2022 and 2050, with £1 trillion passed down by the end of the current decade.* This means more people than ever may be leaving a legacy with potentially a large tax bill attached. Inheritance tax, also known as estate tax, is a complex aspect of financial planning. Whether you are planning to pass down assets to your loved ones or expecting to receive an inheritance, it is important to have a cohesive wealth transfer strategy in place.  

Arrange your free initial consultation

Intergenerational inheritance tax planning 

Financial planning transcends generational gaps and can have a huge impact on all members of a family unit. By looking at the bigger picture of your family’s finances, you can achieve far longer-lasting outcomes than by focusing solely on one generation. Inheritance Tax planning is perhaps the most common form of intergenerational planning. This is an attempt to minimise the impact of inheritance tax on your estate when it passes to your heirs. The Daily Telegraph reported that the number of inherited estates worth more than £1m has increased by over a third in five years, from 8,340 in 2013/14 to 11,210 in 2018/19. In the first half of the 2022/23 tax year, inheritance tax receipts were the largest they have ever been, at £3.5 billion, with £2.6 billion collect in only 13 weeks between April and July. Clearly more and more families are experiencing the same issues in terms of efficiently passing wealth on to their loved ones.  

The gift of giving 

In order to effectively plan for transferring your wealth, it is important to know the rules involved. Firstly, you are entitled to a gifting allowance of £3,000 per year. This can be carried over, if unused, for a maximum of one year. Any gifts above the gifting allowance you are able to make use of the Nil-Rate Band. The Nil-Rate Band allows you to pass on £325,000 of your estate without paying any inheritance tax. Once a gift takes you over this level, it will be classified as a “Potentially Exempt Transfer” (PET). Should the donor die within 3 years of making a gift, the amount would be fully liable to Inheritance Tax at 40%. After 3 years has passed this then tapers down as time passes, ultimately leading to no tax liability if the donor lives for 7 years after having made the gift.

The exact rates of tapering are illustrated below:

Years between gift and death  Rate of tax on the gift 
3 to 4 years 32% 
4 to 5 years  24%
5 to 6 years  16%
6 to 7 years  8%
7 or more  0% 


Given that the 7-year clock starts ticking as soon as the gift is made, it is important to have a clear gifting strategy in place as early as possible, by assessing what assets are surplus to requirements in terms of allowing you to achieve your own objectives primarily. You can therefore start to gift in the knowledge that you are not inhibiting your desired lifestyle. The timing is crucial here. Consider this example – Cheryl gifts £100,000 to her son today, Peter, and she passes away in 2031. By doing this, there would be no Inheritance Tax due upon death and as a result Peter would be able to benefit from the full £100,000. Alternatively, had Cheryl not been so organised and instead gifted the £100,000 in 2028 (within the 3 years before the Inheritance Tax rate starts to taper), assuming that this amount pushed the total assets above the nil rate band, the gift would be liable to 40% Inheritance Tax and therefore Peter would have to pay HMRC £40,000. This could cause issues if Peter had tied the money up in illiquid property, for example.  

In addition to the Nil Rate Band, if your estate is valued below £2m, you are entitled to the full Residential Nil-Rate Band (RNRB) of £175,000, which is an allowance introduced to reduce the amount of Inheritance Tax you might pay when passing on your main residence to direct descendants. If your estate is valued in excess of £2m, a tapering to the Residential Nil-Rate Band will apply and the relief is reduced by £1 for every £2 that the value exceeds £2m. Therefore, the full RNRB will be lost if the value of the estate exceeds £2.35m for individuals or £2.7m for married couples. Combining the Nil Rate Bands and Residential Nil Rate Bands for married couples/ civil partners would therefore potentially allow an estate value of up to £1m to pass to their beneficiaries free of Inheritance Tax upon second death. 

Beware gifts with reservation

While gifting is a crucial element of any intergenerational plan, it is not without its pitfalls. Many families fall into the trap of gifting their home to their children while continuing to live in the property. This is what is known as a ‘Gift with Reservation of Benefits’ and refers to a situation where a person gives away property but still retains some benefit from it. In order for a gift to qualify as a PET, it must be a full transfer of ownership and the person who made the gift must give up all control or benefit over the property. If there is any reservation of benefit, the gift will not be considered a PET and may still be subject to Inheritance Tax upon death.

Why your pension is still one of your most inheritable assets 

As it stands, pensions remain one of the most effective tools for passing wealth to the next generation, in that they do not usually form part of your taxable estate for inheritance tax purposes. Pensions are incredibly tax efficient in that they attract income tax relief on any contributions into them and allow for tax free growth within the wrapper. Furthermore, they can be passed to the next generation free of Inheritance Tax upon death, if they have access to the new Pension Freedom rules. It is important to check if your pension has access to these rules - if they do not then they will form part of your taxable estate and may be liable to Inheritance Tax at 40%. Other considerations such as Trusts, should also be considered but can be quite complex and will involve a solicitor. Therefore, getting in touch with a qualified financial adviser is recommended to see if that is an appropriate course of action. An adviser will also consider if Protection is appropriate to cover any inheritance tax liability.  
It is important to note that wealth planning should not be a compromise in terms of meeting your day to day expenditure. One should have a liquid emergency fund and be able to meet their expenditure requirements in lifetime before considering intergenerational wealth planning.

If you’re concerned about the tax payable on your estate and keen to pass down as much as possible to your loved one, why not get in touch for a free initial consultation to see how we can help. 


Arrange your free initial consultation

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

The Financial Conduct Authority (FCA) does not regulate estate planning, tax or trust advice.