How the great wealth transfer could accelerate in 2025

Changes to the personal finance landscape during 2024 have been significant, to say the very least. To recap some of the headlines, we’ve seen major reforms to inheritance tax (IHT), national insurance (NI), capital gains tax (CGT), value added tax (VAT) and pensions, while interest rates were cut for the first time in four years.

These measures will impact savers, investors and borrowers, spanning multiple age groups, and transform how we approach some big financial decisions.

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This brings us on to the so-called great wealth transfer - the name given to the trillions in money and other assets set to trickle down from the Silent Generation (born between 1928 to 1946) and Baby Boomers (born between 1946 to 1964) to younger cohorts over the next few decades. Investment house Vanguard puts the UK figure at around £7 trillion, in today’s money - an astonishing sum.

When it comes to gifting wealth, it can happen either during your lifetime or on death. Due to the seismic fiscal and monetary shifts that have occurred this year, instances of the former could accelerate to prevent lumping younger generations with a hefty tax bill and/or financially supporting them when they need it most.

Let’s explore the various drivers here in more detail.

1) Pensions brought into IHT net from 2027

As things stand, any unspent pension wealth is sheltered from IHT, resulting in many savers choosing to leave any surplus funds untouched and pass to younger loved ones on death.

But from April 2027, pensions are set to be brought into the IHT net, lessening the attraction of cascading pots down generations.

Depending on how old you are when you pass, beneficiaries could face both IHT and income tax on the pot they inherit, making a significant dent in their financial future. In some cases, the combined tax rate could be north of 70%.

One possible outcome here is that people start to drip-feed pension savings down generations while they’re still alive. There could be implications here too – notably, other than the tax-free element (which is the lower of 25% of £268,275), any withdrawals are subject to income tax.

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But for those with enough headroom to hook out unneeded pension savings and keep their income below the 40% tax band, which kicks in at £50,270, it might make sense to hand over pension wealth now rather than slap loved ones with a tax double whammy on death.

There are still some unknowns here, such as exactly which types of pensions will be affected, that the government needs to clarify, which hopefully we’ll get early next year.

2) Education fees going up

One of the new government’s earliest commitments was to charge 20% value added tax (VAT) on private school fees, shunting up the price of tuition.

As a result, ministers expect 3,000 students to move to state-funded schools before the end of the current academic year. Many parents, however, will choose to foot the additional costs. For wealthier families with large incomes, this may not pose much of a problem. But those whose budgets are already stretched by private school fees may have to make sacrifices elsewhere.

Other education costs are rising, too. University fees are going up for the first time in eight years, although at 3.1% the increase here is more palatable. Annual full-time fees will tick up from £9,250 a year to £9,535.

However, in the absence of outside help, this will be borne by the student over the course of their career. The deduction from their pay packet can take a sizeable bite from their disposable income and restrict affordability for key financial milestones such as buying a home.

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With these two developments in mind, and to relieve parents of the additional burden, we might see older members of the family unit, especially if they have an IHT problem that they’re looking to solve, pass over their accrued assets sooner than originally planned.

The financial benefits of helping younger loved ones can be felt for a very long time. Students leave university with an average loan of £45,000, and interest is added to this figure every year. This means the debt could take many years or even decades to clear.

3) IHT reforms to farms and businesses

Careful succession planning is key to the longevity of any business, and particularly family ones. That’s why the government’s decision to remove the IHT exemption on businesses and farms has been so fiercely contested, including protests outside Parliament.

The reforms to business relief and agricultural relief will come into force from 6 April 2026, giving those impacted roughly 16 months to plan.

As a reminder of what will change, the first £1 million of any farm or business will remain IHT free, but anything above will be taxed at a rate of 20%. Individuals can use their personal lifetime IHT exemptions, which could be up to £500,000 each, and so a married couple or civil partnership could pass on a business and other assets worth up £3 million (and in rare cases £4 million), tax free.

This will force many business and farm owners to rethink their succession-planning strategies and perhaps gift a proportion of their commercial assets during their lifetime rather than on death.

We should flag that if you hand business assets to a younger family member, you still usually must survive seven years to escape IHT, but this might be preferable to being slapped with a hefty IHT bill.

Clearly, in some cases it isn’t that straightforward, especially if the current owner still requires income from the business to fund their lifestyle. As such, legal and tax advice here is crucial.

A further consideration when gifting or transferring assets is CGT. Those concerned about the CGT implications, especially now that rates have risen, could use holdover relief. This means the person who inherits the asset pays CGT, if any is due, when they come to sell them.

4) Borrowing costs set to rise

It’s becoming clear that the impact of the Autumn Budget’s tax and spending reforms, notably the hikes to employer NI, will have broader economic consequences – namely pushing up inflation.

“Since the MPC’s previous meeting, the market-implied path for Bank Rate in the United Kingdom had shifted up materially,” the Bank of England’s Monetary Policy Committee (MPC) said in its meeting minutes after cutting interest rates to 4.75% earlier this month.

The MPC added that the Budget was provisionally expected to boost inflation by just under 0.5 percentage points at its peak, “reflecting both the indirect effects of the smaller margin of excess supply and direct impacts from the Budget measures”.

With interest rates set to remain elevated for longer than previously anticipated, mortgages may also remain expensive. There are now no mortgage deals below 4%, while the Office for Budget Responsibility (OBR) predicts the best mortgage rates will rise from 3.7% to 4.5% next year.

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This would prove a blow to budding homeowners who are already struggling to save the deposit needed to get on the ladder due to soaring rental costs.

In recent years, the Bank of Mum and Dad has played a key role in helping younger generations buy their first home. And events this year may trigger this trend to ramp up, with perhaps more instances of the Bank of Grandma and Grandpa getting involved while still alive, too.

First-time buyers with bigger deposits can secure a better loan to value, giving them a better chance of meeting mortgage affordability criteria. So senior members with excess financial resources may speed up the passing of wealth to support younger loved ones to realise their dream of home ownership.

Get familiar with gifting rules…

If making lifetime gifts is something that appeals to you, it’s worth getting some professional advice. The last thing you want is for your well-laid plan to fall short.

Expert advice will provide clarity as to whether any gifts will come under the “normal expenditure rule”, which means it offers immediate relief from IHT if you can prove your standard of living is unaffected.

If not, as noted above, you may have to survive seven years for the asset to fully leave your estate.

Either way, everyone can give away £3,000 a year without worrying about IHT and can bring forward last year’s £3,000 allowance if unused.