Inheritance tax rules baffle older generations into not sharing their wealth

20 February 2018

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.”


In reply to by anonymous_stub (not verified)

As far as I can see apart from being able to gift £3000-00/year without IHT considerations and of course gifts occurring more than 7 years prior to death, you can as I understand it give away as much as you like out of income (not capital) as long as such ideally regular and recorded gifts do not reduce your standard of living. This facility may be of value to relatively well healed pensioners, but I believe that this can for such individuals occur within 7 years of death.

In reply to by anonymous_stub (not verified)

There has been a rumour for years that the 7-year gifting rule to children will be withdrawn, which would be great in one sense, but not if any annual gift over £3000 (or a new higher amount) attracted IHT irrespective of how long the parent survived. Personally, I think a gift made towards the purchase of a child's main living accommodation should be exempt from IHT (up to a pre-set limit). This would go a little way to helping the current housing crisis.

In reply to by anonymous_stub (not verified)

It's not just inheritance tax. The whole system needs root and branch reform.How can it be right that a single earner raises a family on single persons tax allowances.., until the children start university, when their loans are based on a family unit.Two people (or more) live off one wage, those not working can't claim benefits from the state, but the earner can't claim relief from tax to support those whom they are saving the state from supporting.All of which can be overcome becoming self employed and "employing" those dependants instead. The list is endless.

In reply to by anonymous_stub (not verified)

Inheritance tax in an iniquitous tax, a tax of envy, that takes away a significant chunk of the wealth that an individual has striven to acquire throughout a working life. It does not matter that it was intended for the wealthiest in society: tax always, always, creeps down the line from those whom it was intended to 'catch' to those whom it never originally foresaw as likely to be caught. IHT depletes the wealth of families and prevents the simple passing-on of wealth to succeeding generations. That said, it is avoidable in most cases with careful planning.

In reply to by anonymous_stub (not verified)

The question ’How much can you gift each year without incurring IHT?’ is meaningless since, apart from the £3000 ‘gift allowance’, it depends who you are gifting it to (you can gift your entire estate tax-free to your spouse), how much you are gifting (you can gift up to £250 to as many people as you want), how long you live after the gift is made (you can gift any amount to anybody tax-free as long as you live for 7 years after the gift is made), what the gift is (e.g., wedding gift up to £5000; gifts from surplus income) etc. As the article states, this is overwhelmingly complex and in need of reform.

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