From baby boomers to millennials: understanding the future of inheritance tax and how it affects various generations has become ever more complicated.
The next ten years will be decisive for the fortunes of families across the UK. The ‘Baby Boomer’ generation is approaching retirement age, and many have parents still in good health as well as children and even grandchildren who they want to help financially.
But as a result of these multigenerational estates, many families are facing the prospect of having to plan for not one but two inheritance tax (IHT) bills.
An aging population, combined with record increases in asset values and house prices, means that families across the UK are facing a potential inheritance tax time bomb.
The lack of education and awareness of the problem also means too few people are using the variety of tools that can help reduce the burden of IHT for their family and friends.
A better understanding would allow parents and grandparents to support their children and grandchildren now, as well as protecting their own financial security. All things considered, IHT is set to spike in the next 10 years if nothing is done.
To avoid this, we need to ask how the IHT crisis came about and what IFAs need to do to educate the public, from baby boomers to millennials, of their options.
This is a multi-generational crisis
It is natural for parents to want to pass on their hard-earned assets to their families. Increasingly many are looking to spread the load of inheritance across generations.
In fact, two of every five ‘millennial’ grandchildren have received a lump sum from their grandparents compared to one in five from parents.
For example, a recent Royal London survey predicted that grandparents helping younger family members financially, before and after they die, could result in a potential ‘cascading wall of wealth’ worth as much as £400bn.
While these families may consider themselves comfortable, many may not know they fall into a bracket of wealth subject to significant amounts of IHT.
With allowances frozen since 2009 and asset values rocketing, individuals are facing a perfect storm of factors that have increased the value of their estates, but may also reduce the amount they are able to pass on.
The IHT crisis is not about the government trying to take more money out of people's pockets; it is simply a result of a dramatic increase in the number of people with assets above the existing threshold.
As a result, across the country many families stand to face two inheritance tax bills in relatively quick succession and need to plan accordingly.
The silent threat
To solve this problem, we need to understand why many families may not realise they are affected. The reason for this potential IHT spike is largely due to the record rises in house prices - which has drastically increased the number of individuals liable.