As the UK prepares for an unprecedented wealth transfer over the coming decades, as well as huge inheritance tax changes, many families are starting to reflect not just on how wealth is passed on- but why, and to whom.
Our recent YouGov survey delves into the emotional and financial considerations shaping how people approach succession planning. Our head of personal & family, Mark Stewart, shares reflections on what clients are most concerned about when it comes to transferring their wealth – from fairness and tax to the risk of family fallout.
How we advise on wealth transfer
As private client lawyers, we advise clients on how to transfer their wealth. Typically, for couples, this will often involve the transfer of wealth on the death of the first to die to the survivor (either outright or using trust mechanisms for asset protection purposes). On the death of the survivor, and generally in the case of single people, the wealth then usually transfers from an elder generation of the family to another. But not always – either because there are no family descendants, or there is a wish to divert the wealth to benefit others.
Concerns about fairness – and what fairness means
In advising clients, there are frequently expressed concerns about transferring the wealth. The survey highlights that 28% of respondents are concerned about fairness among heirs. In practice, the words fairness and equality are often interchangeable, but they are of course quite different. Equality, in wealth transfer terms, is normally about economic value – for example, where there are more than one children, ensuring that each receives the same value. While that sounds simple enough, it is often less clear where particular assets are to pass to particular children – there may be questions about the value, sentimental value and future value of those assets. Matters can also become more complicated when lifetime gifts have been made to some of the children (e.g. to help with buying a home) but not others, or in different amounts. "Equalisation clauses" in wills are deployed to even everything up "at the end of the day". Interestingly, the survey highlights that fairness is an increasing concern in families with a larger number of children – 28% for no children families rising to 46% where there are three or more children.
Why fairness does not always mean equality
Fairness however need not be equal. In transferring wealth, clients may wish to take in to account other social, economic and commercial circumstances. Where there is a family business, for example, and some of the children have been involved in its success, and others have not, often a greater share, if not all, of the business passes to those who have contributed. Other clients use their wealth to improve the circumstances of their family who may have been less fortunate in their life, compared to those who have fared better.
Views about these two concepts – equality and fairness – are not always shared. Where for example, a particular valuable asset passes to one beneficiary because of circumstance (e.g. the first born) rather than merit. Many landowners recognise the point; for the land to be retained by the family for generations to come, the economic reality is that it must remain a viable unit and for that it must pass to a singular successor. Sometimes a circle cannot be squared.
One interesting point from the survey is that the relative concern on fairness is higher amongst older people – at 30% for those aged 75+, reducing to 25% to those aged 50-54. Perhaps this indicates that concerns about fairness are reducing over the years.
The role of tax- and how few plan for it
For some, a significant obstacle in the transfer of wealth is tax. The principal taxes in scope on wealth transfer are inheritance tax (on death and some lifetime transfers) and capital gains tax (on lifetime transfers). 28% of respondents were concerned about managing tax efficiency and regional variations (34% in the South East of the UK; 23% in Wales and 21% in Scotland) generally correlate with household wealth – wealthier families being more concerned about the tax efficiency of wealth transfer.
While 28% of respondents were concerned about tax efficiency, notably only 16% have sought professional advice, with a further 29% responding that they would consider professional advice in the future. Coupled with the anticipated "Great Wealth Transfer", as baby boomers in the UK set about passing on c £5.5Tn over the next couple of decades, that points to a significant opportunity for professionals advising in the area. And there is much that can be done in the field of tax planning, making full use of the various "nil rate bands", exemptions and reliefs available. Following the recent Budget changes, and the tightening of inheritance tax on agricultural property, businesses and pensions, it is anticipated that plans will be revisited and accelerated.
Financial responsibility of beneficiaries – not a major worry
People's concerns about their beneficiaries being financially responsible is a relatively low 13%. This is encouraging. We hear much about the different attitudes of younger people to money and spending, but on the whole that concern is not born out by the findings of the survey. In wealth transfer, clients will often include trust provisions to cover the position should they die while their beneficiaries (children, grandchildren or others) are still relatively young. In that event assets are held in trust and managed by the executors/trustees until the beneficiary attains a particular age (often 21 or 25).
Family breakdown and disputes – a very real concern
Of greater concern though is family disputes and family relationship breakdown, with 23% expressing concern in this area. In practice, parents often have little concern about their own (adult) children – they love them, trust them and hope that transferring their wealth to them improves their lives – but attitudes towards their children's spouse, or partner, is sometimes a different matter. The concern is that in some way the wealth transferred is later exposed to a claim for financial provision on the breakdown of the relationship or equivalent. These are real concerns. The laws across the UK approach the point in different ways. Protection can often be achieved through the use of pre- and post-nuptial agreements, and using trusts for lifetime giving or trusts in wills on death.
Family disputes are wider than claims on the breakdown of a relationship. Those disputes might arise because there is a misunderstanding or a failure to communicate regarding the succession plan – notably the survey points to only 10% having thoroughly discussed their plans with their family or beneficiaries, although a further 29% have discussed their plans broadly. And even with open communication, sometimes, following the death of a parent, the next generation cannot see eye to eye – the transfer of wealth can provide a forum for historical or current disagreements between family members to come to the fore, and indeed, fund associated litigation, if it comes to that.
And finally, many are not concerned
Perhaps the most encouraging finding in the survey is that 39% of respondents have no particular concerns regarding the transfer of their wealth. The statistic varies a little (+/- 10%) over age, social and regional demographics, but a significant proportion across the board have no particular concerns.
Explore the full findings
Our Future of wealth transfer survey offers a unique insight into the hopes, hesitations and expectations of people across the UK when it comes to passing on wealth. To see more data and expert commentary, view the full survey here.
Contributor
Head of Personal & Family and Partner
