Tax hikes on dividends and savings risk dismantling the “Bank of Gran and Grandad” by eroding the surplus income retirees rely on to support younger generations, a private wealth law firm has warned.
TWM Solicitors has highlighted that the freezing of thresholds and increases in tax rates are disproportionately hitting older households, potentially curbing the flow of wealth to children struggling with housing and living costs.
According to the firm’s analysis, the additional tax burden on savings is projected to cost taxpayers £500m annually, while higher taxes on dividend income are expected to remove a further £1.3bn from the economy each year.
The warning comes as data reveals a surge in the use of the ‘gifts out of surplus income’ exemption, a key inheritance tax (IHT) planning tool.
The value of such gifts jumped by 177% to £144m in the 2023/24 tax year, as older clients utilised excess pension and investment yield to assist younger relatives tax-efficiently.
However, TWM warns that as the tax take increases, the definition of “surplus” income is being squeezed, reducing the capacity for these immediately exempt transfers.
Madeleine Beresford, partner in the Private Client team at TWM Solicitors, said: “Older people rely on dividend and savings income far more than younger households.
“Increasing tax on both will erode the surplus income many grandparents currently use to support their children and grandchildren — support that younger families increasingly depend on to get onto the property ladder.”
Beresford noted that for many advisers and their clients, these gifts have become a structural part of family financial planning, used to fund deposits, childcare and everyday bills.
“We have seen a huge rise in families using gifts out of surplus income to reduce inheritance tax and give younger relatives a financial boost,” Beresford added.
“But these tax rises make it much harder for retirees to keep doing that. If their dividend and savings income is squeezed, those gifts will fall — at the exact moment younger generations need more support than ever.”
The firm argues that without a balanced environment that protects the spending power of retirees, the ‘pension gap’ and property affordability crisis for younger generations could widen further as familial support creates a shortfall.
