| Gifting can reduce IHT, but poor record-keeping could cause the exemption to be rejected | Gifts with reservation (e.g. continuing to benefit from gifted assets) often trigger unexpected IHT bills | With frozen thresholds and pensions joining IHT, careful planning is more important than ever |
According to Quilter’s inaugural Retirement Lifestyle Report, 13% of retirees plan to cut back on gifting to children and grandchildren. This figure rises to 16% among younger retirees with higher-than-average incomes, and 15% among their lower-income peers, suggesting that even those with relatively strong financial positions are cutting back.
Retirees play a crucial role in supporting younger generations. The report, based on a survey of 5,001 retirees, shows the average retiree currently spends over £2,500 annually supporting younger family members – £1,323 in gifts and £1,175 towards education.
Many retirees, particularly those with higher incomes, gift well in excess of this average and many are far exceeding the current annual gifting allowance of £3,000. Younger, higher income retirees, for example, gift an average of £4,836 to relatives and a further £5,280 towards education annually.
While breaching the annual gifting allowance does not automatically trigger a tax liability, unless the donor dies within seven years, it introduces complexity and uncertainty that may discourage more purposeful financial support. Without action, there is a risk that crucial intergenerational wealth support may diminish further, which would not only have a negative impact on younger generations already experiencing significant struggles themselves, but it would also have a knock-on impact on the economy. The gifting allowance has remained frozen for over 40 years and had it kept pace with inflation, would now sit at £12,000. As such, Quilter is calling on the government to modernise the annual gifting allowance. While it recognises a full uprating could be unrealistic in the current fiscal environment, it is calling for a modest increase to at least £9,000 to enable families to transfer wealth more flexibly and with greater confidence. Even though some people are choosing to gift less right now, many still find it a meaningful way to support family and manage their finances effectively. See overleaf to learn more about how gifting might be a beneficial option for you right now.
Shaun Moore, Tax and Financial Planning expert at Quilter, says: “Retirees provide a vital avenue of financial support for younger generations, helping with everything from education to deposits for first homes. If the Bank of Mum and Dad, or even the Bank of Gran and Grandad, begins to close its doors, the ripple effects could be felt across the housing market, education system and the wider economy.
The gifting allowance is a relic of a different economic era. Even a modest increase to £9,000, for example, would better reflect modern financial realities, ensure it aligns with existing savings vehicles such as the Junior ISA, and could allow families to support one another more freely and purposefully.
The rumour mill is already in overdrive as we near the Chancellor’s upcoming Budget and has so far seen a potential lifetime cap on gifting, an extension to the period donors must live after making a gift before it falls outside of their estate for IHT purposes, and the potential for a further freeze on the nil rate band all debated. While none have been confirmed, the government will clearly be trying to fill a hole in its finances. However, any reform in this area must ensure families can continue to provide support without fear that normal acts of generosity will be swept into the IHT net. Any review of gifting rules should be considered alongside the outdated gifting allowances.
A modernised allowance would support financial planning, reduce reliance on the state and help unlock economic potential. With pensions soon falling within the IHT net, generating a considerable uplift in revenue, this reform would be a modest concession for a meaningful economic gain. If the government’s goal is to foster a high-growth, investment-led economy, then reducing friction around intergenerational wealth transfer is not just aligned with that vision, it is essential to it.”
It is important to take professional advice before making any decision relating to your personal finances. Information within this article is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored advice and is for guidance only. Some rules may vary in different parts of the UK.
