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Gifting rules in need of reform, says wealth management group

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Older generations, who have benefited from the housing boom and generous pensions, are keen to pass wealth on, but are stymied by the current tax regimes, finds new research from wealth manager Quilter.

The group said that societal shifts are likely to leave future generations worse off than their parents. Lifetime gifts make a substantial difference to intergenerational inequality, but the current tax system is a roadblock.

Quilter’s ‘Big Window’ research found that parents and grandparents wanted to give pass on wealth while they are still alive, particularly as younger generations are struggling to make ends meet.

Around a quarter (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. This is in contrast to just 42% who received money at death.

Often, the gift helps them onto the housing ladder at an earlier stage: 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, compared to 63% who didn’t.

IHT review

Quilter said the 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 its wider review of inheritance tax and the group believes this should look the rules governing lifetime gifting.

Rachael Griffin, tax and financial planning expert at Quilter, said: “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.”

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