Inheritance Tax  

How to manage pitfalls of giving wealth to next generation

This article is part of
Guide to intergenerational wealth transfer

This could cause problems if the gift cannot be returned, for example it was spent or used as a deposit on a house. 

Clients often underestimate the age at which they will die, and indeed how much money they will need in their later years. 

Caroline Cochrane, chartered financial planner at Crandles and Co, says they must be cautioned against gifting too much of their assets if they potentially could require these funds later in life.

She adds: “If the gift requires the sale of an asset there may be capital gains liabilities, even if the gift is not sold but gifted wholly then it is deemed to be gifted for money’s worth and will still potentially incur a capital gains liability.  

“It is not unknown for parents to gift the family home to their children and continue to remain within the home; that is considered a gift with reservation and not an outright gift. 

"Unless the parents then pay a commercial rent for the property it will still be considered to be part of their estate. Additionally if the house is legitimately gifted then the children will start to accrue a capital gains liability on the value of the house as it is likely to be considered a second property - unless they too live in it.”

Preparation is key

Lucy Birtwistle, director, Family Office at Stonehage Fleming, says preparing the next generation for wealth is important; providing a wealth distribution can enable them to articulate their own purpose of wealth and their priorities, to gain a financial education - which would include tax - and to build relationships with their own financial and trusted advisors.  

Indeed it may be irresponsible to not give anything if they are due a significant windfall at some point in the future; they need to learn about money, purpose and priorities in advance.  

Ms Birtwistle says: “The potential pitfalls are providing too much without guidance so that the individual therefore lacks their own purpose, drive and aspirations.” 

She adds: “A lot depends on the individual’s set of values, lifestyle, awareness of budget and spending habits, and personality.”

Amaka Ogbonnah, director at Amneo Wealth agrees. She says: "Not understanding the benefit of thinking generationally when it comes to wealth is unfortunate, and in many instances opportunities are lost but a sense of duty to provide could also be detrimental without proper consideration and advice."

The FCA paper on Intergenerational Differences, published in July, said many respondents identified actions that could be taken by the government to tackle intergenerational issues.