Chancellor Rachel Reeves needs to raise an estimated £30bn for the Treasury. With her Autumn Budget just days away, inheritance tax (IHT) could be fair game.
If, as was rumoured over the summer, we end up with a lifetime cap on gifting, could this change the way in which people transfer wealth to younger generations, and signal the end of the so-called Bank of Mum & Dad?
Reducing flexibility
Gifting serves several purposes. It can help young adults to get on the property ladder or go through university. Currently, clients who survive for seven subsequent years get to see the impact of their generosity and to reduce potential IHT liability at the same time.
But the chancellor could upset all this by changing the gifting rules in several ways, says BRI Wealth Management director and head of wealth management advice Andy Gillett.
People are already acting and looking to pass wealth down to their families in different ways
“The first is to introduce a cap on the amount an individual can gift in their lifetime, with a tax charge if this cap is exceeded.
“The second is to extend the current seven-year rule to a longer period, meaning that the gift would stay in your estate for longer ─ for example, 10 or 20 years.”
Stephen Horscroft, a partner in the southeast private client advisory team at law firm Birketts, says wealthier people will still be able to comfortably make large gifts without worrying too much.
“I think the potential changes would be more likely to impact people in the middle, who have enough to be taxable but not enough to be comfortable to just give it all away or give large chunks of it away.”
Hoxton Wealth chief executive Chris Ball believes that, if a cap were to be introduced, it would significantly reduce flexibility for clients.
The potential changes would be more likely to impact people in the middle
“A parent helping a child with a large first-home deposit may find it counts towards the cap, limiting future gifting or bringing forward tax consequences,” he says.
Priorities
Some commentators say that a tax charge would be enough to put off some people from making gifts. But, for others, helping their children financially will be the biggest driver regardless of any tax charge. For them, the Bank of Mum & Dad will stay in business.
Any tax charge would be “just another thing to factor in” for parents who could still afford to gift, says Horscroft.
“It would just be more expensive as you’d have to factor in the tax charge on top of what you’re gifting,” he says.
Many advisers have seen an increase in enquiries relating to IHT in recent months.
The majority of first-time buyers are probably getting some form of assistance from parents
Smith & Pinching associate director and chartered financial planner Matt Beck says 14 families within his top 25 clients ─ those with wealth of between £2.5m and £15m ─ have been active about IHT planning in the past 12-15 months. Planning includes things like direct gifts, gifts into trust and business property relief investments.
“My conclusion is that the change in people’s behaviour is already upon us,” says Beck. “People are already acting and looking to pass wealth down to their families in different ways.”
Protection specialist Naomi Greatorex, managing director of Heath Protection Solutions, deals solely with professional connections ─ around 75% of her business comes through referrals from wealth managers and financial advisers.
Reaction as chancellor considers cap on lifetime gifting
“I don’t think I’ve ever seen so many people coming to us with IHT issues,” she says.
Greatorex thinks that a cap on lifetime gifting could have a negative knock-on effect in the housing market if it impacts the Bank of Mum & Dad.
Greatorex’s daughter, Heather, is managing director at mortgage broker Heath Mortgage Solutions. Around 60% of the first-time buyers she sees are using a gift from their family for their purchase. In 70% of those cases, the full deposit is made through a gift from a family member.
“The majority of first-time buyers are probably getting some form of assistance from parents,” says Heather Greatorex. “How do young people save up to buy a property if they’re renting, which is expensive?”
I don’t think I’ve ever seen so many people coming to us with IHT issues,
Dynamic Planner financial services director Chris Jones points out that government policy elsewhere is focused on making homeownership affordable. The Mortgage Guarantee Scheme, for example, offers a government-backed guarantee to participating lenders on loans of 91%−95% of valuation.
“Why would the government make it harder for young people to get a 5% deposit? It doesn’t square up,” says Jones.
Alternatives
Some commentators think that, if gifting is restricted in the Autumn Budget, parents will look for alternative ways to pass wealth to their children.
“We may see an increase in deeds of variation, with adult children varying their parents’ estates to pass the inheritance down a generation to the grandchildren or into trust,” says Winckworth Sherwood legal director Samantha Warner.
Clients may reconsider whether to gift at all, or may switch to loans instead of outright gifts, adds Ball.
A parent helping a child with a large first-home deposit may find it counts towards the cap, limiting future gifting or bringing forward tax consequences
Begbies Chartered Accountants partner and tax specialist Andrew Brooker expects to see more loans made to children if a cap on lifetime gifting is introduced.
“There are no IHT benefits as a loan is an asset in your estate and remains taxable,” he says. “But often, with the clients I advise, the main priority is how they can support a child that needs support.”
Amanda Newman Smith is features writer for Money Marketing
