Make Time to Talk Intergenerational Wealth

We will also explore family businesses and intergenerational wealth planning. For families with businesses that may be passed to the next generation, Capital Gains Tax (CGT)plays a crucial role in wealth transfer. The proposed changes to CGT and Business Asset Disposal Relief (BADR) announced in the Autumn 2024 Budget make these discussions even more critical. We will also look at the proposed changes to Inheritance Tax on Pensions.

 

Why tackle conversations about intergenerational wealth?

There are numerous benefits for all parties involved in tackling what can be perceived to be a delicate conversation.

Benefits of Dialogue about wealth between Generations for the Older Generation:

• Ensures wealth is transferred according to their wishes, minimizing legal disputes and family conflicts.
• Tax efficiency
• Provides clarity on any plans for specific assets.
• Provides peace of mind that their legacy is understood and will be preserved.
• Creates opportunities to share invaluable financial knowledge and values such as work ethic.

 

Benefits of Dialogue about wealth between Generations for the Younger Generation:

• Reduces uncertainty and promotes readiness for future responsibilities and any inheritance expectations. Prepares for any obligations tied to inherited assets.
• Builds financial literacy and confidence in managing wealth effectively and in line with any legacy.
• Fosters trust and unity within the family, ensuring collaborative success.
• Encourages responsibility and discourages over-reliance on inheritance.
• Encourages collaboration in preserving and growing the family legacy.

 

How to Approach a Discussion About Intergenerational Wealth

From the Perspective of the Older Generation:

1. Start with Legacy Goals:

• Frame the discussion around the family’s long-term legacy. Share stories about how the wealth was built and your aspirations for its impact on future generations.
• Use this opportunity to highlight your values and how they align with financial planning. For example, if philanthropy is important, discuss how to incorporate it into estate plans.

2. Address Practical Needs Early:

• Begin by outlining your intentions for wealth distribution, including any specific plans for assets such as family businesses or properties.
• Share existing plans, such as wills or trusts, and explain their purpose.
• Engage professional advisers to guide the family through tax-efficient planning strategies, including updates based on changes in CGT and IHT laws.

3. Emphasise Financial Literacy and Values:

• Discuss lessons learned about financial management and investing. Offer advice on avoiding common pitfalls, and encourage questions to ensure understanding.
• Highlight the family’s financial principles, such as frugality, entrepreneurship, or a commitment to education, sport or the arts etc, and discuss how these can be preserved.

4. Create a Plan for Regular Dialogue:

• Schedule regular family meetings to review and update wealth plans as circumstances and regulations evolve.
• Ensure that all family members feel included and understand their roles in carrying forward the family’s financial legacy.

From the Perspective of the Younger Generation: Gaining Clarity and Building Financial Independence

1. Initiate Conversations with Curiosity:

• Approach discussions respectfully and with genuine curiosity about the older generation’s experiences and intentions.
• Ask open-ended questions about their vision for the family’s future and how you can contribute.

2. Seek Clarity on Expectations:

• Understand what will be passed on, any conditions tied to inheritance, and the timeline for transitions. This ensures preparedness and avoids misunderstandings later.
• Discuss responsibilities, such as maintaining family businesses or honouring philanthropic commitments, that may come with inherited wealth.

3. Embrace Opportunities to Learn:

• Use these discussions to enhance your financial literacy by asking about budgeting, investing, and wealth preservation strategies.
• Request guidance on navigating tax implications, including changes in CGT and IHT, that could affect inherited assets or family businesses.

4. Discuss Your Own Goals:

• Share your financial aspirations and plans to align them with the family’s broader legacy goals.
• Express a desire to balance personal financial independence with the responsibilities of managing inherited wealth.

Recent changes that need to factored into wealth transfer planning

In the 2024 Budget, the UK government introduced adjustments to CGT that may affect the transfer of family businesses. Key changes include:

• Reduced CGT Exemptions for Family Businesses: The government is considering limiting CGT exemptions for business owners transferring their companies to the next generation, potentially increasing liabilities.
• Tapered Relief Adjustments: Changes to reliefs available for transferring shares may result in higher tax burdens during succession planning.
• The BADR Relief allows for some taxpayers to benefit from a 10% capital gains tax on the sale of part or all of a business. BADR is currently 10% tax on gains made when founders sell their businesses, up to a threshold of £1m. The BADR will rise to 14% from 6 April 2025, and it will rise further to 18% from 6 April 2026 to bring it in line with CGT rates.  
• The lifetime limit for Investors’ Relief will be reduced from £10 million to £1 million for all qualifying disposals made on or after 30 October 2024, matching the lifetime limit for BADR. 

These changes have huge implications on succession planning and could dramatically affect those nearing retirement who have invested in a business and now wish to sell the business in order to fund their retirement. These changes require careful strategies, such as using trusts, gifting, or restructuring businesses, to mitigate CGT impacts.

 

Inheritance tax and Agricultural Property Relief and business property relief

The Autumn Budget introduced significant changes to agricultural property relief and business property relief for IHT.

Starting from April 2026, only the first £1 million of a farming estate or business will qualify for 100% relief. For qualifying assets above this threshold, the relief will drop to 50%, resulting in an effective tax rate of 20%.

The existing nil-rate bands remain unchanged, allowing the first £325,000 of an estate to be tax-free. This increases to £500,000 if the estate includes a residence passed to direct descendants, and up to £1 million when the tax-free allowance is transferred to a surviving spouse or civil partner. Depending on specific circumstances, farming estates and businesses valued at less than £2 million can still benefit from a full 100% exemption.

 

Inheritance tax and Pensions

Another change announced in the budget means that from April 2027, inherited pension pots will form part of an estate (where currently they are exempt) and therefore subject to the usual 40% IHT tax if above the £500,000 threshold. This will mean that pensions can no longer be regarded as a means of transferring wealth from one generation to another.

Given these forthcoming changes, individuals may need to reassess their estate planning strategies to account for the inclusion of pension funds in IHT calculations. Consulting with a Financial Planner or tax specialist can provide personalised guidance tailored to your circumstances.

 

The Path Forward

Given the recent changes to IHT on pension pots and CGT on the sale of a business, it is especially timely to factor these changes in plans and to use these changes as a opportunity to open up conversations. By fostering open, honest, and ongoing dialogue between generations, families can ensure that intergenerational wealth is not only preserved but also grown and managed wisely. Proactively addressing these topics provides both the older and younger generations with tools for long-term financial success while fostering understanding, reducing conflict, and strengthening family bonds.