Most people spend decades working hard, saving carefully and building up assets. A home, a pension, some investments, perhaps a business.
But when it comes to thinking about what happens to all of that further down the line, many of us put it off. It feels complicated, morbid, or simply not urgent enough to deal with right now.
Intergenerational wealth management is the process of planning how your wealth passes to the next generation in a way that’s tax-efficient, reflects your wishes and avoids unnecessary stress for the people you leave behind. This article explains what it involves and why it matters, and shares some practical strategies worth knowing about.
So, what is intergenerational wealth management?
At its simplest, it’s about making sure that what you’ve built ends up where you want it to, and that as little of it as possible is lost to avoidable tax along the way.
That might mean planning how your pension passes to your children, making use of gifting allowances while you’re still alive, or thinking carefully about how your estate is structured. It could involve trusts, life insurance, or simply having clearer conversations with your family about your intentions.
It’s broader than writing a will, though a will is an important part of it. And it’s not just for the very wealthy. If you own a home, have a pension or have built up savings over your working life, intergenerational wealth planning is relevant to you.
Given rising property values across the East Midlands and beyond, more families than ever are finding themselves affected by Inheritance Tax (IHT), often without realising it until it’s too late to do much about it.
Why it matters more than most people realise
IHT is charged at 40% on the value of your estate above the nil-rate band, which currently sits at £325,000. There’s an additional residence nil-rate band of up to £175,000 available when you leave your main home to your direct descendants, bringing the potential threshold for a single person to £500,000, or £1m for married couples or civil partners combining their allowances.
That sounds generous, until you factor in that the average house price in Derby has risen significantly over the past decade, and many people also have pension pots, savings and investments sitting on top of their property. Suddenly, a £1m combined threshold isn’t quite the safety net it might appear.
There’s also a significant change on the horizon. From April 2027, unspent pension funds are set to be brought into the scope of IHT. For years, pensions have been one of the most effective tools for passing wealth to the next generation outside of your estate. That’s changing, which makes reviewing your overall plan more pressing than it might have seemed even a year ago.
Beyond the tax implications, poor estate planning can cause real problems for families. Disputes over assets, delays through the probate process, and confusion about your wishes can all be avoided with the right preparation.
Making use of your annual gifting allowances
You don’t need to wait until you die to start passing your wealth to your family. One of the most straightforward ways to reduce the value of your estate over time is through regular gifting.
Each tax year, you can give away up to £3,000 completely free of IHT. This is known as your annual exemption, and if you didn’t use it last year, you can carry it forward for one year, making it £6,000. You can also give up to £250 to any number of individuals as small gifts, and there are specific exemptions for wedding or civil partnership gifts, of £5,000 to a child, £2,500 to a grandchild or £1,000 to anyone else.
For larger gifts, the seven-year rule is worth understanding. If you give away a sum of money and survive for seven years afterwards, it falls outside of your estate for IHT purposes. If you die within seven years, the gift may still be subject to tax, though the amount reduces on a sliding scale after three years. These larger gifts are known as ‘potentially exempt transfers’.
Gifting as part of a broader tax strategy, rather than in an ad hoc way, tends to produce much better results.
Pensions as an inheritance planning tool
Until recently, pensions were one of the most powerful tools available for passing wealth down the generations. Because they sit outside your estate, unspent pension funds could be passed to beneficiaries free of IHT, making them an attractive asset to preserve while drawing on other savings first.
The 2027 rule changes mean this will no longer be the case in quite the same way. The full details of how the new rules will work in practice are still emerging. But this doesn’t make pension planning less important. If anything, it makes it more so.
Thinking carefully about the order in which you draw down different assets in retirement can make a meaningful difference to how much you ultimately pass on. It’s also worth reviewing your pension nomination forms, the documents that tell your pension provider who you’d like to receive your funds. These often get filled in once and forgotten, despite the fact that your circumstances may have changed significantly since then.
Trusts
Mention the word ‘trust’, and many people assume it’s something reserved for the very wealthy, or too complicated to be worth exploring. In reality, trusts are a practical estate planning tool that more families could benefit from.
A trust is a legal arrangement that allows you to set aside assets for specific people, at a specific time, and under specific conditions. Depending on the type of trust, this can help reduce your IHT liability, protect assets for younger beneficiaries who aren’t yet ready to manage them, and give you more control over how and when your wealth passes down the generations.
There are several different types of trust, each with its own tax treatment and uses, which is why this is one area where taking professional advice really does make a difference. A financial adviser working alongside a solicitor can help you understand whether a trust might be appropriate for your situation and, if so, which type makes most sense.
The family conversation nobody wants to have (but should)
Good intergenerational wealth planning isn’t a purely financial exercise. It also involves talking to your family about what you have, what you’d like to happen to it, and why. These conversations can feel uncomfortable. But the families who have them tend to navigate wealth transfers far more smoothly than those who don’t.
Knowing your intentions in advance helps your loved ones understand your wishes, reduces the scope for disagreements and means they’re not left making difficult decisions at an already difficult time.
Intergenerational wealth management works best when someone looks at your full picture, including your pension, investments, property, protection and estate plan, rather than each element in isolation. That joined-up approach is what we provide here at Glenrose.
Our advisers work with clients across Derby and the East Midlands to help them build financial plans that look beyond their retirement, thinking about how to protect and pass on what they’ve worked hard to create.
So, whether you’re just starting to think about these issues or want to review the arrangements you already have in place, we’re happy to help. Get in touch today to book a consultation and find out how we can help you plan for the generations to come.