14 June 2022
New research from Quilter[1], the investment platform and financial adviser, reveals baby boomers are fearful for their grandchildren’s financial futures. Almost two-thirds (59%) of respondents said they were not confident that future generations would be able to get onto the housing ladder, and more than one third (36%) said they were not confident they would be able to afford to go to university.
The current cost-of-living crisis is likely to exacerbate the pressures on younger generations, particularly Generation Z, who have been dubbed ‘generation precariat’ by the RSA, meaning they are at risk of living precariously, without financial security.
Rising life expectancy could also mean that many people in the younger generations do not receive financial help from older relatives until much later in life, despite likely needing the support far earlier to cover the cost of further education or buying their first home.
More immediately, many in this generation face a triple whammy of tax hikes given the student loan repayment threshold freeze on top of the hike in national insurance contributions and the frozen tax thresholds and personal allowances.
To provide more immediate support during the current cost-of-living crisis, Quilter is calling for a temporary ‘gifting amnesty’ to be introduced, wherein the annual exemption is increased from £3,000 to £10,000 for a minimum of two years to encourage the older generations to pass on their wealth to support the younger people through this period.
Lifetime gifting, such as the annual exemption, is a great example of transferring wealth tax efficiently, but it is widely underused due to a lack of awareness. The annual exemption currently allows you to give away £3,000 worth of gifts each tax year without them being added to the value of your estate even if you die within 7 years of making them. A couple can combine their annual exemption allowances to gift up to £6,000 a year, and any unused exemption can be carried forward for one tax year.
The annual gifting allowance has remained unchanged since 1981. Had the allowance tracked inflation, it would be permissible to gift £9,339.52 per tax year to the end of 2021 according to the Bank of England’s inflation calculator. Given the allowance has been unchanged for 40 years, and the soaring inflation figures seen this year are not yet included in the Bank’s calculations, an uplift to £10,000 for a minimum of two years could make a considerable difference in terms of supporting wealth transfer between generations, while also making up for lost time.
At present, despite the useful, tax efficient nature of the annual exemption, it appears not enough is done to ensure people make use of it. Just 35% of baby boomers had received a financial gift of over £1,000 in their life, which suggests the lack of awareness surrounding lifetime gifting spans more than one generation. As so few experienced the benefit of receiving a gift in their younger years, this could have a knock-on effect in terms of the awareness of and subsequent use of lifetime gifting in later life and could result in a missed opportunity to plan wealth transfer tax efficiently.
Another option for those looking to transfer their wealth to the younger generation tax efficiently is to make regular payments to support their cost of living. As long as you can afford the payments after meeting your usual living costs and you pay from your regular monthly income, there is no limit to how much you can gift inheritance tax free – this is known as ‘normal expenditure out of income’. If you are giving gifts to the same person, you are able to combine these payments with any other allowance, aside from the small gift allowance.
Shaun Moore, tax and financial planning expert at Quilter says:
“Planning your finances to ensure you pass on your wealth in the most tax efficient manner can be very beneficial as more of your money goes to your loved ones instead of the taxman. The current gifting exemption is incredibly outdated and therefore should be adjusted to reflect our current circumstances to help younger generations, even if only for a short period. If the government were to increase the annual exemption amount to £10,000 and encourage more people to make use of it, far more people could be supported when they need it most and it would also help raise awareness of the exemption.
“At present, there is a clear ‘gifting gap’ between those who could afford to make lifetime gifts, versus those who actually consider doing so. While many people may believe they are doing the right thing by holding off on passing on their wealth via a big one-off lump sum until after their death, it may be a good idea to consider the ways in which you can support your family now and also reduce the burden of inheritance tax.
“Lifetime gifting is an important aspect of inheritance tax planning, and it allows you to have more control over where your money ends up. As such, it can be a great way to make the most of your financial assets while also getting to enjoy seeing your savings help your family prosper.
“Where possible, you should seek financial advice to ensure you make the best possible decisions for your circumstances and to help you build a robust financial plan. Within this, an adviser will be able to help you plan small regular gifts to your loved ones during your lifetime, while also ensuring you have enough money left to support the lifestyle you wish to lead.”
[1] Research conducted by Quilter. Total sample size was 826 adults. Fieldwork was undertaken online between 31st January – 1 February 2022. The figures have been weighted and are representative of affluent UK adults in the Baby Boomer demographic cohort – those aged between 58 and 75 with a total of £250,000 or more in household wealth including £50,000 or more in pensions or investments.
