What is generational wealth?

Generational wealth is money that outlives the person who made it. That is the whole of the definition, and it hides most of the difficulty, because the hard part is not the making.

In Britain the phrase usually arrives attached to a house. That is not wrong — property is the largest single component of household wealth here — but it is narrow. What gets handed down is a mixture of assets, timing and knowledge, and the third one is the part families pay least attention to and lose most to.

It is not the same as being wealthy

A person can be comfortable for a whole life and pass on nothing. That is the normal case, and it is not a failure: pensions are designed to be spent, care costs are real, and money that funded a good retirement did its job.

The distinction worth drawing is between wealth that is consumed by design and wealth that is lost by accident — to tax nobody planned for, to a sale forced by a deadline, to a family that could not agree, or to inheritors who had never been told anything about money and received a large amount of it at once.

The first is a choice. The second three are avoidable, and they are what this piece is about.

The rules, briefly

Inheritance tax in the UK works through allowances rather than a simple rate.

Every estate has a nil-rate band of £325,000. Above it, the standard rate is 40 per cent. If at least 10 per cent of the net estate goes to charity, the rate on the rest falls to 36 per cent.

On top of that there is a residence nil-rate band of up to £175,000, which applies when a home passes to direct descendants — children, grandchildren, and some others. It is reduced by £1 for every £2 an estate is worth above £2 million, so it fades out for larger estates.

The allowances can generally be transferred between spouses and civil partners, which is where the frequently quoted figure of up to £1 million for a couple comes from. That figure is a maximum, not a default: it assumes a home passing to direct descendants and both allowances unused.

Two things follow from this. First, a great many estates pay nothing at all. Second, the households most exposed are not the very rich, who plan, but the ones a little over the line who assumed it did not apply to them.

Why the handover is the risky part

The received wisdom that family money disappears within three generations is repeated far more often than it is evidenced, and the studies behind it are thinner than the confidence with which it is quoted. Treat it as folklore rather than fact.

What is better established is the shape of the problem.

The assets are illiquid. Most British family wealth is a house and a pension. An estate can be worth a great deal and have almost no cash in it, which is how families end up selling the thing they most wanted to keep in order to pay the tax on it.

The timing is wrong. Wealth typically arrives when the recipient is in their fifties or sixties and needs it least. Median household wealth peaks in the 65 to 74 age band, and the people who could most use help — the 25 to 34 band, where the median is a small fraction of that — are usually two decades from inheriting.

Nobody talks about it. This is the big one, and it costs more than the tax. Families that discuss money — what there is, what it is for, what is expected — hand it over intact far more often than families that treat the subject as private until a solicitor's letter makes it public.

What passing it on well looks like

Give earlier, if you can afford to. Help with a deposit at 30 is worth several times the same sum at 60, because it buys three decades of compounding and a lower cost of living in between. The rules around lifetime gifts are genuinely complicated and worth real advice, but the principle is not: money is most useful when it is needed.

Deal with the liquidity. If the estate is a house and a pension and the plan is that the house stays in the family, something has to pay the tax. That is a problem to solve while everyone is alive, not at probate.

Write it down. A will, kept current. Pension death benefit nominations, which sit outside the will and are forgotten with remarkable consistency. A list of where things actually are.

Teach it. The most durable thing a family can pass on is the habit of handling money well. It costs nothing, it is not taxed, and it is the only part of an inheritance that cannot be spent.

Start with the number

You cannot plan a handover without knowing what there is to hand over. Most people have never added it up.

Work out your net worth, then look at what proportion of it is property and pension. If that share is high — and for most British households it will be — you have found the liquidity question, and it is the one worth taking to a professional.

Inheritance tax planning is one of the areas where advice pays for itself, and one of the few where the rules genuinely are too intricate to handle from an article. This piece is here to tell you which questions to ask, not to answer them for your family.