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UK’s younger generation expecting to inherit to fund their future financial goals

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The UK’s younger generations are counting on the transition of wealth between generations to fund their financial goals, reveals new research from Fidelity International. 

Two-fifths (43 per cent) of people expect to receive an inheritance or lifetime gift2 of wealth from family and friends at some point, with millennials and Generation Z – or those under the age of 45 – the most expectant generations (65 per cent). The average inheritance received currently stands at GBP70,639, with lifetime gifts amounting to GBP58,439.  

Almost a third (32 per cent) of those who have already received an inheritance or lifetime gift – or expect to in the future – have directed the funds towards their savings or pension. A quarter (24 per cent) have used this to pay off a mortgage, while over a fifth (22 per cent) put the money towards climbing the property ladder – highlighting the extent to which the transferral of intergenerational wealth is fuelling the housing market. 

Other plans include paying for one-off expenses or ‘luxury’ items (18 per cent), paying off debts (17 per cent) or student loans (9 per cent), or simply funding-to-day expenses (14 per cent). 
Dawn Mealing, Head of Advice Policy and Development at Fidelity International, says: “Buying a home and saving for retirement are considered two of the most significant milestones upon the road to financial security. However, our research highlights just how many of the UK’s younger generations are counting upon the passing down of wealth from family and friends to achieve them.

“Families are increasingly looking at how they tackle these goals together, considering how and when this transition of wealth takes place – either as an inheritance, or sooner as a lifetime gift – so it can be used most effectively. With expectations high, it’s important that families and friends discuss their intentions so there is a clear understanding of the wealth that will be passed on and when.” 

Despite many people looking to use their inherited wealth to achieve long-term financial goals, less than half (45 per cent) have taken some form of investment advice. A fifth (20 per cent) went to another professional for advice, while 16 per cent looked online and 15 per cent spoke with an independent financial adviser (IFA). Just over one in 10 (14 per cent) spoke to their bank.  

Mealing continues: “Financial advice can provide invaluable support for those looking to pass wealth on, as well as to those who receive it. From the perspective of the older generation, seeking advice can help them to navigate the complexities of Inheritance Tax (IHT) and mitigate some of the potential losses the 40 per cent rate might pose. 

“For those who receive an inheritance, it could well be one of the largest single sums of wealth they ever receive. Financial advice can offer invaluable support and peace of mind when it comes to knowing how best to approach this, particularly when the recipient has specific financial goals in mind. This can also place them in the best possible position to start planning how they might want to support their own dependants further down the line, giving investments made on behalf of their own children time to grow.”
 
While younger generations may expect to receive an inheritance, they’re less confident about their ability to pass on wealth to dependants themselves; 57 per cent of under 45s (increasing to 59 per cent of under 35s) are worried about how they will afford to pass on an inheritance while maintaining their own standard of living – although noting that more than half (55 per cent) of those under 45 still intend to do so.
 
Key considerations when passing on wealth include: Inflation erosion – With IHT thresholds frozen, but with inflation likely to rise, more estates are likely to get caught by the 40 per cent IHT tax rate – meaning potential disappointment for ‘Generation Expectation’.

To gift or not to gift – Gifts up to GBP3,000 per annum can be made free of IHT. Any gift in excess of GBP3,000 will become a potentially exempt transfer. It will remain IHT-free if you survive for seven years after making it. If you die within the seven-year period, the gift will become subject to IHT. It is also worth noting several annual exemptions for gifts; each tax year you can also give away wedding or civil ceremony gifts of up to GBP1,000 per person (GBP2,500 for a grandchild or great-grandchild, GBP5,000 for a child), and GBP250 per person per year assuming none of the other exemptions have applied to the recipient within that tax year. Anything in excess of these limits is considered a Potentially Exempt Transfer (PET), at which point the seven-year rule will apply.

Pension potential – Pensions aren’t included when IHT is calculated. Using other assets to fund your retirement means pensions can be passed on tax-free while gradually reducing the size of the taxable estate.

Surplus sums and regular gifts – Surplus income left to accumulate increases the value of the estate. It could be effectively used to fund children’s pension contributions, mortgage payments or, life insurance or illness cover. Regular gifts from surplus income must be regular, payable from income and not affect the donor’s standard of living to qualify as IHT exempt.

CGT vs. IHT – IHT is a tax on the value of a deceased’s estate. Capital Gains Tax (CGT) is a tax on profit. Gifting an asset during your lifetime may mean both taxes interact with expensive consequences. Paying CGT now to save IHT later may not make financial sense. If you are planning a large gift, seek advice.

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