Family picnic

Re-balancing generational wealth

The housing minister recently suggested that the generational inequality between the so-called baby boomers and the millennials might be reduced if parents were to leave their properties to their grandchildren (rather than their children) in their Wills. Such a gift may be significant as a recent estimate stated that those aged over 55 in England own property equity worth more than the GDP of Italy.

What do you need to consider if you wish to make your own contribution towards correcting the generational wealth imbalance?

  • Remember that care fees are expensive and longevity is generally increasing, so if you wish to help the younger generation with lifetime gifts you should ensure that you retain sufficient assets to pay the fees on a care home of your choice or to provide sufficient care in your own home.
  • If you are still working, and have excess income above that needed to maintain your normal standard of living, then you might consider making gifts on a regular basis out of income as these should be free from inheritance tax (IHT) however long you survive them and, if your circumstances change, you can stop the gifts at anytime.
  • There may be significant equity in older people’s homes but any gifts from the equity are difficult to make in a tax efficient way. Any gift of your home, if you continue to live there without paying a full market value rental, will be ineffective for IHT saving purposes. It’s easier to share equity if you decide to downsize as any capital gift then made from the sale proceeds will be IHT free if you survive it by seven years. Alternatively your financial adviser may be able to suggest how your equity can be utilized to support a younger member of the family in obtaining mortgage finance.
  • You might have doubts about how your children or grandchildren might use any gift you make to them. If the assets given are substantial a trust can ensure that a degree of asset protection is maintained and the trustees will manage the asset on your issue’s behalf. As far as smaller gifts are concerned, it may be helpful to pay the sum gifted direct to, say, your child’s student loan provider or to your grandchild’s school to reduce fee payments.
  • If you are considering skipping a generation to leave assets to the grandchildren, this can save IHT as the asset will not pass through your children’s estates. However, it would be advisable to discuss this with your children first as disgruntled children who do not believe that they have received reasonable financial provision from your estate can claim against it. Remember too that your children might appear to have sufficient income and capital at present but events such as divorce and business failure can change that quickly. An alternative is to put assets into a discretionary trust in your Will so that a decision can be made at the time as to how your estate is to be distributed between your children and grandchildren taking into account the circumstances then in force.
  • If you inherit from your own parents, but feel that your children could benefit more from the money, then consider varying your parent’s Will within two years of their death to pass a share of the estate on to your children as this can be done without any inheritance or capital gains tax liability for you. If you wish to retain access to the assets for the future, but want to ensure that they are outside of your estate for IHT purposes, then you might consider putting them into a discretionary trust set up by a deed of variation of your parent’s Will. This will be an effective tax planning strategy as the gift will be deemed to have been made by your parent for IHT purposes, there will be no IHT charge on the trust assets on your death and there will be a fund available at the trustees’ discretion for the whole family.

Finally in any planning always take account of the IHT residence nil rate band to be introduced from next April as it is easy to fall foul of these complicated provisions and find that you have lost the relief. This will increase the IHT liability on your estate and deplete the funds available for the next generation.