The Great Wealth Transfer

The “Great Wealth Transfer” is here. As the wealthiest generations in the UK begin to age and pass away, their assets are now being passed down to their younger family members.

Abrdn reports that in the 2020s alone, £1 trillion is expected to be passed down within UK families. The average age for inheriting from grandparents is 29, while the average age of those receiving an inheritance from parents is 44.

For young people, the Great Wealth Transfer could act as a lifeline. With house prices, the cost of goods and services, interest rates, and travel all costing significantly more today than they did five years ago, your children and grandchildren could gain huge peace of mind when receiving generational wealth.

If you’re approaching or in retirement and are beginning to think about leaving your own legacy, now is the time to pay this matter serious attention. Leave your personal “great wealth transfer” up to chance, and your beneficiaries may not reap the full rewards of your hard-earned wealth.

In this article, you will read about:

• Four potential ways to transfer wealth to the next generation
• The tax implications of these different routes, with the recent Autumn Budget in mind
• The power of financial planning for those passing wealth down.

Keep reading to learn more.

4 ways to pass wealth down to the next generation and the tax implications of each

We understand that the main roadblock that often stands in the way of you transferring wealth to the next generation may be tax. If you’re worried about you or your beneficiaries paying too much tax, you could be less likely to go through with your wealth transfer plans.

After all, tax receipts are rising across the board. In the period between April and September 2024, HMRC reports its Income Tax, Capital Gains Tax (CGT) and National Insurance contribution (NIC) takings were £226.8 billion, £6.2 billion higher than the same period in 2023.

What’s more, HMRC took £4.3 billion in Inheritance Tax (IHT) between April and September 2024, up £0.4 billion from the previous year.

With this to consider, here are four strategies for passing wealth down to the next generation.

1. Bequeath your estate in your will

Traditionally, an estate is passed to the next generation after the owner of the estate dies. If the person has a will, the estate is usually divided according to their wishes – if not, the estate is likely to be bequeathed according to intestacy law.

While this is a very common way to pass your wealth to the next generation, if you live to a very old age, your loved ones may be waiting decades to receive wealth that could be of more use to them today.

What’s more, if you have accumulated substantial wealth during your lifetime, your loved ones could pay IHT on the sum they receive after your death. At the time of writing, spouses and civil partners don’t pay IHT on their late partner’s estate, but children, grandchildren, and any other beneficiary could be liable to pay this tax.

As of the 2024/25 tax year, and frozen until 2030, the Inheritance Tax (IHT) nil-rate band – the amount a person can inherit tax-free – stands at £325,000. There is also a residence nil-rate band of £175,000 for those passing their main residence to direct descendants. So, in total, you could bequeath assets worth up to £500,000 in your will without your loved ones paying IHT.

Plus, if your spouse passes away first and leaves you their entire estate, any of their unused nil-rate bands are added to your own, meaning that together you could leave behind a tax-free estate worth up to £1 million.

Crucially, in the 2024 Autumn Budget, chancellor Rachel Reeves announced a change to IHT rules. At the time of writing, your pension doesn’t usually form part of your estate for IHT purposes. But as of 6 April 2027, Reeves says pensions will be included in a person’s estate, which could mean your loved ones pay IHT on pension wealth you leave behind.

It’s important to pay attention to these changes (and IHT in general), especially if you plan to leave most of your wealth in your will rather than transferring wealth gradually over your lifetime.

2. Give financial gifts gradually throughout your life

If you have created a financial plan with the help of a professional and feel confident that you can comfortably afford the retirement you want, you might wish to start transferring wealth to the next generation before you pass away.

Your beneficiaries may be hugely grateful for the funds you offer over the years, as it could enable them to reach important life milestones of their own.

Plus, offering smaller financial gifts over the course of your lifetime could be a more tax-efficient wealth strategy than bequeathing your entire estate in your will. This is because, as of the 2024/25 tax year, you can offer up to a certain amount as a financial gift without it forming part of your estate for IHT purposes later.

Here’s what you need to know about offering financial gifts:

• Each person benefits from an annual exemption, standing at £3,000 in 2024/25, within which you can give away cash or assets to as many people as you like. For instance, if you have two children, you could give them each £1,500 a year tax-efficiently.
• The annual exemption is individual, so you and your spouse or partner could effectively “double” your tax-efficient gifts to £6,000 a year.
• You can carry forward any unused annual exemption for one tax year only.
• If your child is getting married or entering a civil partnership, you can give them £5,000, or £2,500 if they are your grandchild or great-grandchild.
• The small gift allowance of £250 means you can give up to this amount to anyone, as many times as you like, provided that they haven’t already benefited from gifts within your annual exemption.
• Giving a gift worth more than your annual exemption is known as a “potentially exempt transfer” (PET). PETs could be liable for IHT if you pass away within seven years of giving the gift. In these cases, IHT may be applied on a sliding scale known as “taper relief” – consult your financial planner if you believe this could affect you.
• If you have surplus income left over each month or year, you could potentially give this away tax-free, no matter the amount. This is a strategy known as “gifting from income” and, while constrained by several rules, could be a highly tax-efficient way to transfer wealth to the next generation.

Forming a gifting strategy could be pragmatic in light of frozen tax thresholds and rising receipts. These gifts could reduce the value of your estate over time, leaving less wealth vulnerable to IHT after you pass away.

3. Place wealth in trust

We’ve published previous insights into how placing assets in trust could enable you to pass wealth to the next generation while remaining tax-efficient.

Depending on the type of trust you set up, and the rules you stipulate within it, your beneficiaries could receive either a gradual income or a lump sum at a time you see fit. This could be when they turn a certain age, for instance, or even after you’ve passed away.

One commonly believed myth, though, is that trusts are “tax-free”. This is not normally the case. While some forms of trust do reduce the rate of IHT from 40% to 20%, there is likely to still be an IHT charge on assets in trust after you die.

Plus, it’s important to be aware that income your beneficiaries receive from a trust could be liable for Income Tax at their marginal rate.

This being said, trusts could form an important part of your wealth transfer strategy, especially if you have a large amount of wealth to bequeath. Talking to a Kellands financial planner about the type of trust that’s right for your family, and selecting the right trustee – the person in charge of distributing the funds – is crucial.

We’re here to answer any questions you may have about the benefits and potential drawbacks of ringfencing wealth within a trust.

4. Invest on behalf of your beneficiary

Finally, a popular wealth transfer strategy is to place assets in your child’s name with a view of reducing the value of your own estate, and decreasing its IHT liability all the while.

There are two main ways to go about this:

• Purchasing property in your child’s name. This could mean that your child technically owns the property rather than inheriting it from you after you pass away, removing a large chunk of wealth from your estate. However, the rules around doing this are complex. For instance, if you cover the mortgage repayments and your child is seen to charge you “rent” to live in the property, IHT could still apply later. What’s more, if your child wants to buy their own property, they may be liable for increased Stamp Duty and Capital Gains Tax (CGT), as their new property is likely to be considered a second home. As such, it’s crucial to seek advice before you purchase property on behalf of your child.
• Buying shares in their name. If the beneficiary is under 18, you could start a pension or Junior ISA (JISA) for them. Within these vehicles, you can invest your wealth in the knowledge that it will belong to the child when they reach the age of 18. Tax-efficient contribution limits apply to both pensions and JISAs.

As with all the above strategies, it is wise to gain independent, qualified financial advice before coming to a decision about transferring wealth to the next generation.

We’re here to help you consider all your options, helping you to balance tax efficiency with quality of life for both you and your beneficiaries.

Get in touch

To talk to a professional about transferring wealth to the next generation, email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning, trusts, or will writing.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts. 

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Your home may be repossessed if you do not keep up repayments on a mortgage or other loans secured on it.

Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.

Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.

< back to News & Views