The importance of generational financial planning

Families in the UK are set to transfer around £5.5 trillion worth of assets over the next 30 years, according to data from the Kings Court Trust.

Not only is this an extraordinary shift in the wealth of the nation, but it throws up a myriad of issues that can only be solved through careful financial planning.

There are many things to consider when it comes to your own generational financial planning. Not only is it about passing wealth on in the most efficient way, but it also matters that your children and even grandchildren are given the best head start possible.

Generational financial planning is an essential aspect of overall financial planning. You need to think about passing on money, and what questions to consider before you set a plan in motion.

Understanding how much of your wealth you’ll need while you’re alive is a critical starting point. Then thinking about which aspects you’d like to give away at death, and which you could begin to give earlier will help you to define your ultimate goals.


Gifting unpacked

Gifting is the biggest variable possibility when it comes to generational financial planning. There is a myriad of rules and allowances when it comes to gifting, pertaining exclusively to the mitigation of inheritance tax (IHT).

At a basic level, you’re allowed to gift money, household, and personal goods such as furniture or jewellery, property, stocks and shares or even unlisted shares. However, how much and when you gift them makes a significant difference to your potential IHT liability.

For cash gifts you can make £3,000-worth of gifts a year tax-free, known as the ‘annual exemption.’ You can give it all to one person or divide it between several. It is also possible to carry the allowance forward for one tax year.

The £3,000 annual allowance can be used to pay into a pension for your child or a junior ISA (JISA). While classed as a ‘potentially exempt transfer’ you’ll need to live for seven years (covered more below) to avoid liability if you go over this limit of contributions – not impossible when the annual JISA limit is £9,000.

Paying into these kinds of accounts has the benefit of extra long-term planning for your children’s future financial health and can mitigate your worries in older age as they grow, have careers and families of their own.

You can also make gifts of up to £250 per person each year with no overall limit, as long as that person hasn’t been included in the above £3,000 of gifting. This is called the ‘small gifts allowance.’

If your child is getting married, a £5,000 gift is permissible, or £2,500 for a grandchild. You can give up to £1,000 tax free to anyone else you know getting married.

Regular payments to others are also permissible with no limit. However, the caveat here is that you must be able to meet your regular living costs while making such payments and it must come from your regular monthly income. These are known as “normal expenditure out of income.”

You can give such regular payments to help a child pay their rent, pay into a savings account for a child under 18 or even give financial support to an elderly relative. These can be made over and above the £3,000 annual allowance. Trusts are also possible but can be subject to income tax on withdrawal.


Seven-year rule

Beyond this is a really important rule, known as the ‘seven-year rule.’ Essentially you can give away any part of your estate and not face IHT on the assets, but you have to live for seven years after making the transfer.

As the seven-year deadline approaches, the tax liability also reduces. Between three and four years it’s 32%, four to five years  it’s 24%, five to six years it’s 16% and six to seven years it’s 8%.

What is really important with the seven-year rule is taking into consideration your health and life expectancy. If you’d like to give something major to a loved one, such as property or even a share portfolio, then the sooner you do it the better.

This might of course not be the right route to go down as a portion of your wealth can be inherited tax-free anyway. A financial adviser can help you make a decision around this on the best way forward.

Ultimately, when planning for intergenerational wealth there is much to consider. While the challenges that come with this might seem daunting, with planning it is possible to set yourself and your loved ones up for the most successful outcome possible.


Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

The information contained in this document is not to be regarded as an offer to buy or sell, or the solicitation of any offer to buy or sell, any investments or products.

The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.

All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 14th June 2023.