Sarah Hills, Wealth Proposition Director

‘Wealth never survives three generations’, or so an ancient proverb says. This reflects a common theme in wealth management that, without careful planning, the funds amassed by one generation are often lost by the time it reaches the third. 

As we approach what has been dubbed the ‘Great Wealth Transfer’, (JRF, 2024) an estimated $70 trillion in assets is projected to flow from baby boomers to younger generations globally in the coming years. In the UK alone, this figure is projected to reach £5.5 trillion, according to Kings Court Trust, 2017. However, many people fear the wealth that they have spent a lifetime building may be lost rapidly through this wealth transfer. Financial advisers are uniquely positioned to help their clients secure their financial legacy through thoughtful strategies that mitigate risks and maximise wealth preservation.

Tax mitigation

With tax rates at historic highs, and the looming possibility of further increases, it’s critical for clients to understand the impact of Income Tax, Capital Gains Tax (CGT) and Inheritance Tax (IHT). 

Advising clients to maximise their pension and ISA allowances, and to utilise other tax planning investment vehicles, are some of the ways their estate could be managed. 

IHT is sometimes referred to as a voluntary tax as there are numerous ways to mitigate its impact.

• Advisers could highlight the importance of leveraging the £3,000 annual gift exemption and the ‘normal expenditure out of income’ rule to ensure gifted money is shielded from unnecessary taxation. Any money left to a spouse/civil partner after a person dies is also fully exempt from IHT.
• It’s also important to clarify what gifts are classed as Potentially Exempt Transfers (PET) or Chargeable Lifetime Transfers (CLT) and are therefore outside the estate after seven years. Care must be taken with CLTs as these can still increase the overall IHT due if further gifts are made in the seven years that follow. This is referred to as the ‘14-year rule’.
• Those owning certain businesses or unlisted/Alternative Investment Market (AIM) shares can qualify for business relief on IHT. Since April 2026, business relief has been reduced from a 100% rate of relief to 50%, meaning an effective IHT charge of 20% on qualifying assets. However, family farms and small business owners will receive an additional fully tax-free allowance on the first £2.5 million. 

Advisers must ensure their clients understand that to qualify for business relief, the deceased will need to have owned the asset for at least two years before they passed away.

Pensions

Pensions have evolved into powerful vehicles for passing wealth to younger generations. Since the introduction of the beneficiary’s flexi-access drawdown in April 2015, pension funds can be retained in a largely tax-free environment for beneficiaries, provided nominations are in order. These funds can be inherited by future generations, creating a long-term wealth transfer strategy. 

However, during Rachel Reeves’ inaugural Autumn Budget announcement, she revealed that, from April 2027, pensions will nearly always be included in an individual’s estate for IHT purposes. 

Additionally, beneficiary’s pension withdrawals are taxed as income where a scheme member passes away after age 75, potentially pushing them into higher or additional rate tax brackets on large withdrawals. That said, these income tax implications may encourage more responsible long-term investing, helping to ensure funds aren’t depleted too quickly. 

Given the potential impact of these changes, it is now more important than ever for advisers to guide clients in reviewing their pension strategies to ensure they remain tax efficient and align with the new rules.

Trusts

For those who have concerns about inherited wealth being wasted, trusts offer a valuable solution for maintaining control over asset distribution.

In the UK, discretionary trusts can typically run for up to 125 years. Advisers can help clients to understand the role of trustees in overseeing these assets, ensuring that any legacy is distributed responsibly across future generations as and when needed. 

Onshore bonds

Onshore bonds can offer another tax-efficient way to pass down wealth working alongside trusts. 

These bonds can be assigned to family members without incurring a chargeable gain. Additionally, the new owner will be treated as if they owned the bond from inception, allowing them to benefit from full top-slicing relief and any unused 5% tax-deferred allowances on future encashments. 

When used as a trustee investment, the trustees benefit from a non-income producing asset and also the ability to utilise the 5% tax-deferred withdrawal allowance when funds are needed. This means less administration and tax for the trust, with the ability to assign all or part of the bond (assuming it is set up as a number of cluster policies) to a beneficiary at a later date, which usually results in tax savings.

Financial advice

The foundation of preserving generational wealth lies in securing high-quality, professional advice. Many wealthy individuals will have well-established relationships with advisers, but this may not be the case for other family members.

If families understand the value an adviser brings, they are more likely to retain their services after a client passes away. Advisers should establish a clear line of communication regarding who to consult after a client’s passing so the necessary support and guidance is available. 

Financial advisers have the opportunity to collaborate with clients and provide tailored advice, to help create a financial legacy that survives across generations. 

To learn more about the ways to mitigate financial risk through taxation, visit the LV= Technical Hub.

Any references to taxation are based on our understanding of current legislation and HM Revenue & Customs practice which can change.