The bewildering nature of inheritance tax (IHT) rules leaves wealthier older generations confused and therefore unwilling to risk sharing their wealth with younger generations.
According to research from wealth management firm Brewin Dolphin, the average amount people believe they can gift each year without incurring inheritance tax is £1,575. This is nearly half the actual allowance of £3,000. Only one in 10 (12%) respondents to the survey actually answered with the correct figure.
Moneywise reported in January that millennials (people aged between 25-35) will only inherit their baby boomer parents’ wealth at the age of 61, on average.
It seems the confusing nature of the rules appears to be stopping either generation from benefitting from significant pools of wealth built up over years.
Nearly half of parents surveyed (44%) said they would give more money to their children if they were allowed to do so without tax implications, while more than one in three (35%) grandparents would do the same. Two in five (40%) simply don’t feel confident enough to make financial gifts to loved-ones.
It is unsurprising therefore that the government has announced a review of IHT to be carried out by the Office of Tax Simplification (OTS). The review will look closely at the distortions that the unpopular tax has on individual’s decisions around investment transfers and other transactions.
Liz Alley, head of financial planning operations at Brewin Dolphin comments: “Inheritance tax can be incredibly confusing, so it’s not surprising to hear that many people are unsure how much they can gift each year. It is music to my ears that the Chancellor recently wrote to the Office of Tax Simplification for a review of inheritance tax to ensure the system is “fit for purpose”. It’s clear from our research and from speaking to our clients that the system needs looking at.
“However, we’d also like to see the annual gifting allowance increased. It has remained at £3,000 a year since the early 1980s and we believe that if this was increased we would see more families pass wealth down through the generations. Not only will this give younger people the financial leg up in life that so many need, but it would also help older generations from an inheritance tax perspective.”