£1tn is expected to change hands in the 2020s, known as the Great Wealth Transfer. Therefore, it is unsurprising that inheritance planning is an increasingly important part of wealth management, with such significant amounts of wealth and assets being passed down from baby boomers to younger generations.
Rising property prices, asset price inflation and frozen tax thresholds mean that more and more people are being dragged into paying inheritance tax (IHT), leading inheritance tax receipts last year to hit a record £7.5bn. What is more, given that this figure represents less than 1% of total tax revenues and was levied on only 4% of the population, a chancellor seeking to raise taxes to plug a £22bn fiscal black hole may find an IHT raid too tempting to turn down.
History suggests that preserving and growing intergenerational wealth is notoriously challenging, with 70% of US families losing their wealth within two generations and 90% losing it within three generations. Unfortunately, it is far too common for people to address this issue in the wrong place, focusing initially on what they invest in rather than their framework. Identifying investment goals, aim and timeframes is in our experience the best place to start, which then allows you to identify the optimal framework that will provide the bases and essential guidelines in managing your wealth.
Being proactive gives you the best chance of achieving your goals. Having discussions around death and legacy can be difficult, but it is far easier to talk about it when you are in a stable position in your life. Managing your finances and investing are often emotive, so it is far from ideal to have to make big decisions when you’re going through emotional distress linked to sickness or bereavement. Even high-level discussions with practical steps of who to contact if you become incapacitated can make the process far less painful.
Changing preferences?
Every client is unique, but there are broad generalisations that can be made around the investment preferences such as a higher proportion of younger generations placing a greater importance on Responsible Investing. To be clear, Responsible Investing is still investing with the traditional focus on return rather than philanthropic, but approaching it with the mindset of considering more the environmental, social and governance (ESG) aspects of what I’m investing in.
This can also bring in a wider range of people into investing, as even if they’re not particularly interested in economics or financial markets, they are drawn in by the idea of using investing to achieve goals. As the face of wealth changes, it’s important to evolve investment services to reflect that.
Deciding on your goals, aims and preferences is the key fundamental step to managing your assets successfully. Tax is a function of the value of your assets and it’s important to realise that it is often detrimental to place too much emphasis on trying to minimise your tax bill rather than grow your assets. Growing assets in the most efficient way possible is optimal. Particular investments, like the Alternative Investment Market (AIM), come with tax efficient properties but you should only invest in this if it fits in your framework. Don’t let the tax tail, wag the investment dog.
Already upon us
The great wealth transfer is already upon us, and the passing down of significant wealth from the Baby Boomers will leave Millennials as the richest generation in history. Our CIO Caroline Simmons recently spoke at the FT Weekend Festival about the importance of putting in place a framework before starting to invest.
Footage provided by Financial Times Live.
When should I start to plan for Inheritance Tax?
Our CIO Caroline Simmons recently spoke at the FT Weekend Festival, sharing her views on the importance of starting early.
Footage provided by Financial Times Live.