According to research by the Big Window for Quilter, the wealth manager, parents and grandparents want to give their loved ones more money while they are alive. Younger generations are struggling to make ends meet and this money may make a substantial difference.
Quilter is urging the government to use the inheritance tax review to fix an outdated tax system which is heavily skewed towards wealth being passed at death.
24% of UK adults* have already passed on wealth to loved ones and 32% plan to, according to the research. Over 60% of those who receive money from living relatives say it makes a substantial difference to their lives, whilst just 42% of those who have received money at death say the same.
Those passing on wealth during their lifetime are primarily trying to help their loved ones get a foot on the housing ladder. And it’s making a difference. 81% of 25 to 34 year olds in the sample who had received a cash gift from a living relative also owned their home, outright or with a mortgage. This drops to 63% for those who did not receive such a gift.
However, current tax rules encourage potential donors to wait until they die to pass on wealth, whether via pension death benefits or the main residence nil rate band.
The Office for Tax Simplification is currently preparing a second paper as part of the IHT review which should cover the rules governing lifetime gifting within the IHT context. This offers an ideal opportunity to recommend to the Chancellor that he reforms the lifetime gifting rules to suit modern day needs.
Rachael Griffin, tax and financial planning expert at Quilter:
“A recent report from the Office for National Statistics revealed societal shifts have created a generation of financially stunted adults in their early 20s. Crucial life milestones are getting pushed further and further down the road, in a large part because the upcoming generations are less well off than those before them and are desperately seeking funds to get a toe on the housing ladder.
“The government has an important role to play to stop this absurd scenario turning into some kind of dystopia. The long-term solution will inevitably require dramatic shifts in the housing market, but, in the meantime, there are some simple resolutions that can ease the scenario.
“The tax system has, in essence, encouraged people to pass on wealth when they die. The annual IHT gifting allowance has remained at £3,000 since 1981. Had the annual allowance tracked inflation, it would’ve been permissible to gift £11,296 per tax year in 2018, according to the Bank of England inflation tracker.
“We know there are lots of people that would like to pass wealth down to their families while they are still alive. Increasing the IHT gifting annual allowance would encourage some of that money to cascade down the chain, giving a welcome financial boost to younger generation and could go some way to making the conservative party more palatable to younger generations.”
David Miller, Investment Director at Quilter Cheviot Investment Management:
“Throughout my near 40 years advising families about their investments, inheritance tax has been recognised as a voluntary tax. If you would rather leave your money to HMRC then fine, but otherwise, and with good advice, forward planning can make a huge difference to the following generations. It’s never too early to start the process.’’
*The research sample was a mix of ages and ABC1C2 social grades, half with higher asset levels and half with lower