The Great Wealth Transfer and how wealth is passed down

A huge shift in wealth is underway, with decades of accumulated assets set to be passed down the generations. This has been dubbed the Great Wealth Transfer, and it’s the largest of its kind in history. In the UK alone, it’s predicted that a staggering £5.5 trillion will flow down to younger generations by 2050. But what does a wealth transfer actually involve? On this page, we’ll explore how assets are transferred and how families can prepare.

Wealth transfer is the process of passing on assets from one generation to the next. Generational wealth can include cash, investments, property, or even family businesses. While the transfer most commonly takes place after death through a will, some people choose to transfer wealth during their lifetime, whether through direct gifts or by spending it on family activities, like holidays. This is sometimes referred to as “giving while living”.

Wealth transfer isn’t always straightforward. It can come with challenges for both the person handing over the assets and the recipients. That’s why many families seek advice from financial advisers. This can be particularly helpful for the beneficiaries, who may find themselves having to make decisions about potentially large amounts of money or investments that they might have little knowledge of.

The Great Wealth Transfer refers to the significant shift of wealth from the older generations to younger generations. It’s estimated that globally, $84 trillion will cascade down the generations over the next few decades, making this the largest intergenerational wealth transfer in history. In the UK, around £5.5 trillion is expected to be transferred between generations by 2050*.

The wealth transfer doesn’t always follow a consistent path from one generation to the next; it can skip generations to benefit those who may need it the most. The majority of funds are expected to go down the generations, but the remaining wealth may end up going to charities.

An important feature of this wealth transfer is the different approaches to growing wealth among the generations. Baby Boomers tend to hold a mix of stocks, bonds, cash, and property. Conversely, the younger generations tend to show a greater interest in sustainable investment types.

This intergenerational wealth transfer brings both challenges and opportunities. Younger heirs may look for new financial advice, possibly switching advisers, while differences in financial priorities between generations and also genders will likely also play a role.

There are a few different reasons for the huge amount of wealth held by older generations in the UK. Demographic trends are a key factor; people are living longer, so older generations are holding onto their wealth for longer than ever before. This has meant that the wealth that has accumulated over a lifetime is taking longer to trickle down to younger generations.

Another important factor is the significant rise in property values and stock market growth over the decades. This has primarily benefited the Baby Boomer generation. From the mid-1980s to 2021, the value of household wealth in the UK grew from three times the size of the economy to nearly eight times**. That accumulated wealth is now being passed down to children and grandchildren.

It’s unlikely that everyone will benefit from the Great Wealth Transfer. While many people hope for an inheritance, only a small portion may actually get one. Families with higher incomes in the first place are the ones most likely to benefit.

There’s the added drawback that older relatives may be hesitant to pass on money early, as they might be worried about covering their own retirement and care costs. As a result, generational wealth transfers may come too late in life to be truly beneficial, or they may even skip a generation entirely.

This disparity highlights the importance of taking control of your finances now, rather than waiting for a possible inheritance at some unspecified point in the future. 

Fixed rate bonds offer some of the most competitive interest rates around, so now could be a good time to compare savings accounts and boost your savings.

A smooth transfer of wealth requires open communication within the family. While it might feel like an uncomfortable conversation to be avoided, talking about inheritances is key to making sure everyone knows what to expect. Thinking about the death of loved ones is never easy, but discussing practical matters now can make things smoother later on.

There are a few steps families can take to make intergenerational wealth transfers easier, including:

• Create a will and make sure it’s regularly updated. That way, your wishes will be legally protected, and your wealth distributed as intended. It can also help to prevent disputes and conflict among family members.

• Consider tax-efficient wealth transfer strategies. In the UK, you can use annual gifting allowances or set up trusts to pass on wealth bit by bit. This can help reduce the amount of tax that eats into the assets as they’re passed down. Plus, younger generations get to benefit when they need the money most, such as for education or buying their first home.

• Try to talk with your relatives openly about money. It’s not something many people feel confident about, but the younger generations will need to have the personal finance skills to be able to manage their inheritance responsibly.

• A certified financial planner can provide advice and strategies to balance your needs with your wealth transfer plans. They can also provide guidance on strategies like charitable giving, saving for retirement and pensions, and tax-relief investments such as ISAs.

• Beneficiaries may find it helpful to work with their own financial planner, as they can make decisions without outside pressure. They can manage their inheritance in a way that’s in keeping with their personal preferences.

Whether you decide to pass on your assets during your lifetime or after you’ve passed away will depend on your goals and your family’s situation.

One common strategy is lifetime gifting, where the wealth transfer takes place while you’re still alive. It can help reduce your estate’s value, which might lower the inheritance tax your beneficiaries will pay. However, there are limits and rules around how much you can give before tax is due.

The other main strategy is to leave an inheritance through your will. This lets you pass on wealth after death, with the distribution managed according to your wishes. Inheritance tax may apply here, depending on the value of your estate.

Another option is upstream gifting. This involves giving assets to older family members, rather than younger ones. It can sometimes be more tax-efficient since older relatives may have higher tax allowances or lower tax rates, potentially reducing the overall tax burden.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

Transferring wealth in the UK can come with hefty inheritance tax (IHT), set at 40%. Currently, inheritance tax only applies to the part of the estate that’s above the tax-free threshold of £325,000. However, there are ways to reduce this tax burden, whether you’re passing on property, possession, or money.

1. Transfers to a spouse or civil partner

The simplest way to avoid inheritance tax is by transferring assets to a spouse or civil partner. There are no limits on how much you can transfer, and everything is completely tax-free. This also applies to any inheritance left to your partner in your will.

2. Donations to charity

Gifts to charities, art galleries, museums, and other qualifying institutions are exempt from tax, making it an easy option for those wishing to support causes close to their heart while keeping tax to a minimum.

3. Junior ISAs and children’s savings accounts

If you have younger people in your life, opening a junior ISA or children’s savings account can be an effective way to transfer wealth to them. Interest earned on these accounts is typically tax-free, although if a child earns more than £100 in interest from a parent’s gift, the parent may have to pay tax on it.

4. The 7-year rule

If you’re keen to transfer your wealth early on, keep in mind that gifts made more than seven years before your death are usually exempt from inheritance tax. This applies to everything from money and property to personal items like jewellery or antiques. If you pass away within seven years, the gifts may still be subject to tax.

5. Gifting money

You can currently gift up to £3,000 per year without incurring tax. You could therefore transfer small amounts each year. This can be especially helpful for helping children or grandchildren with a house deposit or university fees. Just keep in mind that this is a total allowance for the year, and doesn’t apply per recipient. Trust funds are also often used as a way to minimise the tax burden for beneficiaries, but the rules can be complicated. Find out more about gifting money to children.

6. Pensions

Pensions are usually exempt from inheritance tax because they aren’t part of your taxable estate. This makes them an efficient way to transfer wealth. By keeping your pension savings invested within the plan, you can potentially save on inheritance tax while also benefiting from tax advantages on future investment returns. If you die before the age of 75, your beneficiaries may be able to withdraw funds tax-free.

7. Spending while you’re alive

While not technically wealth transfer, spending money on activities that benefit the whole family can lower your taxable estate. This way, you can enjoy life while making lasting memories with your loved ones.

Grow your wealth in a way that’s safe, steady, and reliable. A high-interest savings account can help you build a legacy for future generations.

With a fixed rate bond, for instance, you’ll lock in a competitive interest rate for your chosen term. It’s an easy and effective way to ensure more of your hard-earned money can benefit your loved ones.

Opening a savings account with Raisin UK is quick, simple, and free. By registering today, you’ll gain access to competitive rates from trusted banks and building societies, helping you leave more for your children or grandchildren.

*https://www.abrdn.com/en-gb/intermediary/insights-and-research/wealth-transfer-how-to-prepare-for-the-responsible-heirs

**https://www.resolutionfoundation.org/publications/wealth-check/