Intergenerational Wealth: The challenges of passing wealth between generations

In the past 75 years since the end of World War II,  families have become wealthier than ever before. New business creation has surged, retail investing has become far more widespread as stock markets have risen, and the value of the country’s housing stock has reached new highs. 

Take the value of the UK housing stock alone that’s worth over £9 trillion.¹ Additionally, the value of equity and fund investments rose by over eight times in the three decades from 1987 to 2021, reaching £1.07 trillion.² Finally, the number of private businesses has increased by about two thirds to 5.4 million in just over 10 years.³ 

That leaves many people, especially baby boomers (aged 61 plus), facing the challenge of how to pass wealth on to their children. Or, even more ambitiously, how to create a family legacy? Doing so takes careful planning if you want to have the potential to succeed in your goals and overcome any challenges. It could also, however, buy your children security and ease their path through life.

To give a sense of perspective, the past few decades’ upsurge in entrepreneurialism and bull markets in asset prices mean that a huge amount of wealth stands to be handed over during the next 25 years. To give an idea of the order of magnitude, one asset management company estimates that £7 trillion will pass between generations by 2050 in the UK,⁴ as part of a wider global phenomenon known as the ‘Great Wealth Transfer’.

The importance of proactive wealth transfer

It’s never too early to begin planning multi-generational wealth strategies. To start with, you need to consider your succession planning goals. Who do you want to transfer your wealth to and over what period of time? You might wish to benefit different family members at different stages of their lives. 

Grown up children might need help with buying their first home, or you may want to pay for your grandchildren’s school fees.

Equally, you might want to support a charity that’s close to your heart. The government encourages charitable donations by offering tax incentives to individuals during their lifetimes and when leaving legacies.

Succession and estate planning provides a framework for thinking about transferring wealth. Depending on your goals and how wealthy you are, there are many different ways to pass on your wealth. They range from relatively simple tools such as gifts and other tax-efficient strategies to more complex ones such as trusts and family investment companies.

Wealth transfers during life, for instance, passing assets that have gone up in value over time to a spouse removes any capital gains tax liability (at the time of writing).

A carefully considered Will should be the cornerstone of your estate planning. Not only does it set out your beneficiaries, but also it’s an opportunity for doing so in a tax-efficient manner.

Building wealth for future generations through long-term investing

Just as transferring wealth between generations can take place over years, or even decades, it may be appropriate to use a long-term investment horizon. Doing so can mean an investor is not impacted as much by short term fluctuations in value, making them more able to accept  investment risk. Whilst not guaranteed, over time, this may be compensated by higher returns.

For example, the world’s wealthiest ultra-high-net-worth families often invest large proportions of their portfolios in equity investments such as stock markets and private equity. Indeed, the biggest family offices often make their own direct private equity investments. Some have the luxury of doing so because their investing time horizon spans several family generations and as they do not need access to the money, they do not mind their investments being illiquid or subject to short to medium term falls in value.

At Brown Shipley, our job is to understand your goals for intergenerational wealth transfer. From that we identify an appropriate course of action for you. This takes into account not just your goals but also your access requirements, investment preferences, personal circumstances and appetite for investment risk.

An investor seeking to transfer assets to the younger generation over a period of time might wish to follow a ‘growth’ investment profile or strategy. This profile seeks capital appreciation over time but with the possibility of larger and more frequent fluctuations in the value of the portfolio over the medium to long term than would be experienced in a lower risk portfolio.

Typically, a growth portfolio would primarily invest in UK and international equities. There may also be some investments in bonds, alternative assets such as private equity and cash.

By contrast, a lower-risk ‘balanced’ investment profile would hold fewer equities and more bonds. It is designed with the aim of  resulting in less volatility but has the potential to restrict the gains over the long term.

While Brown Shipley offers standardised investment profile-based portfolios, we can craft a bespoke portfolio if your preferences are better addressed in this way. Providing the portfolio size exceeds a minimum amount*.

Preparing the next generation: financial education and involvement

Whether in the UK, China, the United States or many other countries, there’s a cautionary tale about rags to riches and back to rags again. Normally, this family cycle is said to take three generations. 

This pattern has been true for some families but not all.  At Brown Shipley, we believe that educating the next generation helps to prepare children for inheriting wealth. They can learn how to take control of investments from as young as 18 and make their own decisions how they use it.

Some families ask the children to join their annual investment meetings, so they can hear about the progress of their investments. Apart from the child learning, it’s an opportunity for them to express what they would like from an investment.

Research appears to support the value of education and interaction from an early age.⁵ Two things make a difference:

Key points about intergenerational wealth transfer to remember

How to pass on the substantial wealth many people in the UK have accumulated is becoming an increasingly important topic. Not only is there an unprecedented amount for heirs to inherit but also the UK government views this as a key area of tax policy.

Any individual wishing to transfer wealth has a range of tools and allowances for doing so. At the time of writing, there is a range of gifts that you can make without paying IHT in your lifetime. For those with more complex and sizeable estates, there are tools such as trusts and family investment companies.

It’s also key to select an appropriate investment strategy. You should select an investment approach that reflects your goals for intergenerational wealth transfer. You may well decide on a long-term investment approach, similar to Brown Shipley’s ‘growth’ investment portfolio.

Lastly, you should teach your children and heirs about money and how to manage it. Doing so from a young age may help them to take a prudent approach throughout their lives.

Intergenerational wealth transfer is complex and getting more so. But done well, it can help to build a family legacy and make a material difference to your children. At Brown Shipley, we can help you to find an approach to wealth succession planning that’s right for you.

Planning to transfer wealth to your children may seem a topic for the distant future, but it’s never too early to start.

Get in touch with a Brown Shipley Client Advisor to learn more, or download our 'Your Essential Guide to Passing On Wealth'.

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