This is why 2025 could be the start of the ‘Great Downsizing’, says ANDREW OXLADE

Britain faces many pressing financial challenges. One of the worst is the predicament of people under the age of 30, known as Generation Z.

For the first time, a generation will be significantly poorer than the previous one.

This is known, but the fact that the most viewed TED talk of 2024 was mentioned how the US is destroying the future of young people perhaps underlines how this debate is gaining momentum.

New York University marketing professor Scott Galloway offers a sharp rebuke that will resonate with young people, and his assessment is as relevant to Britain as it is to the US.

The problem facing a typical twenty-something is daunting: how to buy a house and pay off debt while building an emergency fund and saving future savings.

The numbers are sobering. First-time buyers in England put down an average of £55,372 to secure a home, a huge amount to save – and especially when the average British salary for people aged 22 to 29 is £32,292.

A red-hot rental market makes the challenge more difficult. Rents have risen by around 28 per cent in four years, bringing the average monthly cost to £1,330, the Office for National Statistics says.

Buying your first home has always been difficult. But never that difficult.

When I got on the property ladder in 2001 and bought a one-bed flat at the age of 28, the average house price was 3.6 times the average salary.

Today the ratio is 6.1, according to Nationwide Building Society (see chart below).

And student debt is also very different. My £9,000 in maintenance loans seem insignificant by modern standards.

Today’s students could easily find themselves facing £50,000 in debt on graduation day. They will then face a 9 percent pay bracket to repay the loans for those fees and living expenses. There is little or nothing left to save.

The Resolution Foundation think tank underlined this grim situation in an ‘Intergenerational Audit’ last month.

The study found that the percentage of young people under the age of 35 living with their parents had risen from 26 percent in 2000 to 39 percent in 2022.

It blamed the “expensive housing, repeated economic shocks and stagnant living standards” that have defined our financial lives in the 21st century.

The numbers have likely worsened in recent years as house prices continue their relentless rise.

What can stop, slow down or even reverse this trend of generational impoverishment?

Perhaps Labor will deliver on its housing commitments, easing pressure on property prices. Perhaps the limited levers within tax and benefit policy will be directed towards the young. Given the history of successive governments in these areas, neither seems certain.

What could then be a meaningful solution? Perhaps the obvious answer is that the generation that has more could give to the generation that has less.

There is a mechanism for that: death. The number of adults receiving an inheritance in a two-year period has risen from 1.7 million in 2008-10 to 2.1 million in 2018-20.

These two donation rules are essential

But of course you can avoid death by giving away wealth while you are still alive, and appreciating your own acts of generosity.

In the tax world this is called ‘donation’. It’s worth familiarizing yourself with all the donation rules, but I’d say two of the most important are:

1. That you can give away € 3,000 every year free of inheritance tax. This can be carried forward for a year, giving you the opportunity to give away £6,000 if you miss a year.

2. You can give away as much as you want, and if you live for seven years you won’t be liable for IHT. You also pay less than the full rate of 40 percent if you die between three and seven years after the donation; the rate expires.

But there was little reason to donate. In fact, there was a very good reason to hold on to your money and use your retirement plan as an asset planning tool. Pensions are exempt from IHT.

If you die under the age of 75, the pension pot is passed on completely tax-free. A death after the age of 75 means that beneficiaries escape IHT on the pot, but have to pay income tax on withdrawals from it.

But an important change is coming. The pension exemption will be abolished in April 2027, as announced in October’s autumn budget, and this will shake up many areas of financial planning. It could also trigger an unprecedented giveaway.

As a reminder of the basic inheritance tax rules, you can leave up to £325,000 tax-free when you die, with an additional allowance of £175,000 if you leave your house to your children or grandchildren.

Couples with direct descendants may be able to leave up to £1 million tax-free as they can transfer unused allowances. The tax rate on the remaining liability is 40 percent.

With such high limits, less than five percent of estates are liable. But that is changing.

The share of liable inheritances was expected to rise rapidly anyway, and changes in inherited pensions will only accelerate this trend. (The graph below shows the official forecast BEFORE the pension change).

This is because mainstream asset prices, such as those for property and share markets, have risen higher, so that the £1 million threshold looks much less generous today than when it was set, in 2017.

Take a married couple with a £500,000 house who have each built up £300,000 in pensions and between them have £100,000 put away in Isas. Before the Autumn Budget they would have easily avoided IHT as their pension pots would have been ignored.

Under the new system there would be a potential 40 per cent liability on the £200,000 portion above the £1 million combined fees.

Of course, it is impossible to know how much your pensions and Isas will shrink as they are used to fund your retirement. You cannot predict the time of your death.

But there is also a lot you can plan within the estate planning options. Trusts, legal structures that can protect assets from estate taxes, are likely to become much more popular.

Estate planning is complex and one of those areas where specialist support is highly recommended.

The power of giving

More than anything else, the attractions of giving away or spending money will increase from 2027 onwards.

Giving was already on the rise. According to the Resolution Foundation, the value of gifts over £10,000 increased from £13.1 billion in the two years leading up to 2008-2010 to £29 billion in the two years leading up to 2018-2020.

These donation amounts may seem paltry compared to the amounts that could be delivered in 2030 or in 2035.

Faced with the double pressure of future tax problems and a son or daughter needing a mortgage deposit today, it will make more sense to donate.

It could even trigger a wave of downsizing among people in their 50s and 60s as they try to make their wealth more liquid.

This could in turn ease pressure on the real estate market. In combination, this could reduce the wealth gap between generations.

Parents want to help. The 2024 Fidelity Global Sentiment Survey found that most Brits want to help their descendants – 61 percent made it a priority to ‘help my children/grandchildren with their future financial situation’.

Yet only 25 percent were confident that this would be possible. This was in stark contrast to the global average of 40 percent.

There is a growing need for more radical thinking. When I’ve spoken to senior colleagues and colleagues in the pensions sector in recent weeks, most are reconsidering their plans.

Many told me they are seriously thinking about downsizing, when previously it was a vague idea.

It has a dual appeal: freeing up large amounts of money that can be passed on to contribute to initial deposits.

But it also has a more self-indulgent appeal: why postpone your acts of kindness until after death? Give now, enjoy seeing it used – and pay much less tax, too.

Perhaps a bigger downsizing trend will start from here. And perhaps the most watched TED Talk of 2035 will chart how the Great Wealth Transfer began in 2025.