Five planning tips for Millennial Millionaires

Lubbock Fine, 6 March 2018

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By Clare Munro, senior tax partner
020 7490 7766

Chancellor of the Exchequer, Philip Hammond has just asked the Office of Tax Simplification to upgrade inheritance tax. Although that might help the baby boomer generation to understand it, the inheritance tax problem is unlikely to disappear.

The ‘millennial’ next generation is set to inherit more wealth than any previous cohort, albeit not until, on average, the age of 61. Seemingly therefore, the millennials’ plight creates an opportunity to manage a looming inheritance tax problem.

Much will depend on family resources but the following suggestions offer cross generational planning for a range of wealth profiles.

  1. Lending funds for a flat deposit
    The millennial can access the housing ladder and benefits from the current first-time buyers’ SDLT holiday; capital gains relief for their main residence covers gains on sale. However, he can’t spend the funds and one can reclaim them on a divorce. Property value growth is for the next generation.
  2. Pay off student debt
    Student loans can be £50k or more and interest is running at up to 6.1%. Repayments are a drag on millenials’ disposable earnings and on their ability to repay a mortgage or rent. A £50,000 gift reduces the parents’ inheritance bill by £20,000, assuming survival for seven years afterwards.
  3. Fund a pension
    Millennials are likely to be long-lived but underestimate their life expectancy. Regular payments into a pension fund, out of ‘surplus’ income do not affect the donor’s inheritance tax position. A £2,880 contribution is treated as net and the government adds £720 to make £3,600 gross. Income and growth accrue tax-free in the pension scheme; the parent reduces the inheritance tax liability.
  4. Establish a fund for grandchildren
    Income is treated as the child’s so she benefits from personal and savings allowances. The gift is outside the donor’s estate after seven years. It’s also proof against the children’s divorce.
  5. Family investment company
    Companies can work well as vehicles for intra-generational wealth. Income is taxed at corporate rates which are currently lower than personal ones. A company’s dividend income is generally tax free. With care, shares can be passed to children and grandchildren. Family shareholders can extract dividend income, mitigating the tax liability with dividend allowances and lower rate bands.

Planning for the millennial generation should be part of a wealth planning strategy but, with thought, the tools are there to help millennials before they qualify for a Freedom pass.

This article can also be viewed via the London Business Matters website here.