Dubbed the ‘avocado generation’, millennials stand on the brink of becoming the wealthiest demographic in history, inheriting substantial assets from their parents.
For some parents, they may consider passing on their assets early – here are pivotal considerations to bear in mind.
(Read Time: Approx. 5 minutes)
Topics Discussed:
- Understanding the financial implications of gifting property and savings to your children.
- Strategies to mitigate potential financial and legal pitfalls in the wealth transfer process.
Despite common stereotypes painting millennials as lavish spenders, their struggle with home ownership is not a result of financial mismanagement but rather the steep climb of property prices, often reaching up to ten times their earnings.
However, the tide may be turning for millennials, thanks to significant upcoming wealth transfers.
The latest Wealth Report by Knight Frank highlights a forthcoming era where millennials are expected to inherit vast wealth and assets over the next two decades, potentially making them the wealthiest generation to date.
This wealth primarily stems from the property assets of the silent generation and baby boomers, amounting to over £2.5 trillion.
In recent times, an increasing number of baby boomers have been aiding their millennial offspring with significant financial gifts, further cementing this shift.
This trend towards early wealth transfer, as reported by estate agencies such as Savills, indicates a growing number of first-time buyers receiving financial assistance from their parents, showcasing the burgeoning group of millennial homeowners.
The necessity for such transfers underscores the challenges faced within the current property market, characterised by low supply, high demand, and the recent cessation of government assistance programs.
Beyond parental assistance, other family members also play a crucial role in facilitating the transfer of wealth, as indicated by research from Skipton Building Society.
As families navigate these transfers, the complexities of inheritance tax, capital gains tax, and other financial implications necessitate careful planning and consideration.
How Does Inheritance Tax (IHT) Work?
Inheritance tax is levied on the value of your estate upon death, with allowances set at £325,000, and an additional £175,000 if your residence is bequeathed to direct descendants, totalling a £500,000 exemption.
However, gifts made within seven years of death may be subject to taxation, highlighting the importance of strategic gifting and potentially securing life assurance to cover unforeseen events.
Capital Gains Tax Liabilities
Capital gains tax may apply upon transferring property, especially concerning secondary residences.
This tax is calculated on the profit gained from the sale, with rates varying according to your tax band, underscoring the need for strategic asset management.
Stamp Duty Land Tax Charges
Transferring property as a gift may seem straightforward, but complications can arise, such as stamp duty liabilities.
If the recipient assumes an existing mortgage or if they already own property, potentially incurring additional Stamp Duty Land Tax costs.
Gifting your home to your child whilst living in it
Gifting your home while continuing to reside in it without paying market rent may still subject the property to inheritance tax, despite surpassing the seven-year gifting rule.
Renting from your child at a fair market price could circumvent this issue, albeit with tax implications for the recipient.
Transferring assets to your child but not their partner
In transferring significant assets, the stability of the beneficiary’s relationships should be considered to ensure the wealth remains within the intended family lines.
Legal measures, such as prenuptial agreements, can offer protection in these scenarios.
Be cautious of retirement costs
While aiding younger generations is commendable, it’s vital to balance such generosity with your own financial security, especially considering potential care costs in later years.
Becoming a guarantor for your child’s mortgage
Serving as a guarantor offers an alternative to direct financial gifts, enhancing your child’s borrowing capacity.
However, this comes with its obligations and potential risks, necessitating careful consideration.
Case Study – Sarah Wright
Sarah Wright, a 29-year-old events producer from Essex, represents a growing number of millennials whose path to homeownership has been significantly eased through familial support.
After spending the majority of her twenties travelling for work and occasionally staying with her parents, Wright embarked on the journey to secure her own property.
With a generous contribution of £30,000 from her parents, coupled with her own savings of £30,000 accumulated while earning £85,000 annually and living at home, she managed to compile a £60,000 deposit.
This substantial sum enabled her to purchase a one-bedroom flat in Wanstead, northeast London, for £302,500 in December.
Wright’s meticulous financial planning, including her adept use of a lifetime Isa to boost her savings, was instrumental in her success.
She states, “I am a spreadsheet queen, so I made a budget list for literally everything I did, and I also released some money from a lifetime Isa savings account.”
She further acknowledges the pivotal role her parents played, not just financially but also by providing her with a place to stay during her savings period.
“Of course, without my parents’ help — both the money and letting me live with them — it would have been impossible.”
This narrative underscores a stark contrast to the housing market of previous decades. Andrew Wishart of Capital Economics notes that, in 1990, the average house deposit in the UK was £6,793, roughly half the average salary at the time.
Today, the deposit requirement has escalated to £60,000, approximately double the average salary, illustrating the increasing challenges faced by first-time buyers and the crucial role of intergenerational wealth transfer in overcoming these hurdles.
Summary
As the landscape of wealth transfer and property ownership evolves, it’s clear that careful planning and consideration are key to ensuring a smooth transition of assets to the next generation.
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