Blog: How will today’s ‘wealth mountain’ be inherited?

Dianne Paterson, a Partner at Edinburgh-based law firm Russel + Aitken LLP, looks at the shifting sands of inheritance rules and what the future holds for the swelling “wealth mountain” of more than £400 billion held by today’s ageing population.

(This article originally appeared in The Scotsman newspaper)

What did our grandparents inherit from their parents and how much inherited wealth were their parents able to pass down the line?

Obviously much depended on who they were and what they owned, but the chances are that it really wasn’t a great deal.

Disputes about silver teaspoons and porcelain dinner services were more commonplace in the early 20th century, and wills, if they existed, tended to detail personal possessions rather than property and wealth.

The point is that there was usually very little in the way of savings, and even less in the way of property, as far fewer people at that time owned land or a house.

This meant that, in financial terms, their deaths had little impact on the material wealth of their children.

However, this has been gradually changing over the years, and is set to change even further in the coming years.

A “wealth mountain” of more than £400 billion is set to be passed down from grandparents to the younger generations in the coming years, an insurer has recently calculated.

Sir Steve Webb, a former pensions minister, who is now director of policy at Royal London, said last month: “There is a wall of housing wealth set to cascade through the generations in the coming years.”

“Many in the next generation feel under considerable pressure to pass any inheritance straight on to their own children as they are acutely aware of the challenges faced by their millennial offspring”.

He continued: “Those millennials lucky enough to have home-owning parents and grandparents may be set to benefit from significant inheritance which will help them on to the housing ladder.”

It is understood that Royal London had surveyed more than 5,600 people from the older, middle and younger generation of adults to find out about their plans and expectations for receiving an inheritance.

It found that among the grandparents surveyed, the value of the typical estate expected to be left was in the bracket of £400,000 to £500,000.

Good news for millennials it would seem; however, the report warned that those millennials set to benefit from this expected cascade of wealth were more likely to be in the minority amongst their age group.

The research found that only around four million of the seventeen million people aged 25 to 44 were in the “fortunate position” of having grandparents and parents with housing wealth.

To date, the impact of inheritance on creating inequality has been relatively small – the average inheritance representing only 3% of any other income that a beneficiary could expect to generate in a lifetime; however, the predictions are that this is likely to change in future years.

A reduction in home ownership, static net earnings, and declining pensions will make it more difficult for young people to accumulate wealth in the future. It will also make them more likely to be dependent on inherited wealth from family.

However, this inherited wealth, built up from soaring house prices and various property booms, is likely to create huge inequalities and widen the gap even further between rich and poor.

To those who set the policy in the Thatcher years, it was not meant to be this way. Margaret Thatcher set her sights on a Britain where three out of four families would own their home and where families would have a degree of independence that their forefathers could only have dreamt about.

Homeownership today stands just slightly above the rate when Thatcher made this prediction. Anyone under the age of 45 is now much less likely to be a homeowner than people of the same age 25 years ago, while the reverse is true of older age groups.

Private renters account for more than 20% of the housing market; in 1985, the figure was just 9%.

Earlier this year the Institute of Fiscal Studies produced a report on the impact of inheritances on inequality across and within different generations.

They concluded that young people today are more likely to receive an inheritance than earlier generations; however, those who will receive the biggest ones are already the most well off. It stated that amongst people born in the seventies, about 90 per cent of the highest earners would receive wealth from deceased relatives, compared with about a half of workers with the lowest incomes.

It would seem that action is needed now to address this rising inequality, to prevent the wealth of younger generations being dependent once again on who their parents were and what their parents owned.