The idea of inheritance is changing, sparked by issues such as the high cost of house purchase and the impact emotionally and financially of the Coronavirus crisis, suggests Mark Wintle, inheritance tax specialist, WAY Investment Services,
The pandemic of 2020 has led to a fundamental rethink in many aspects of our lives. The concepts of where and how people, work, shop and even spend time with the people they care about most have been turned upside down. Whilst we can expect some of our old habits to blissfully return once the worst of this disease has passed, some may have experienced a permanent shift.
The idea of inheritance is certainly going through a bit of a change in identity. Traditionally, and according to the dictionary, inheritance is something received by an heir on the death of the previous holder. But with the pandemic giving us daily reminders of our own mortality, and the denial of social contact making it easier to appreciate in a way we might never have done before, many families have been considering how they can support younger (and future) generations sooner rather than later. Why wait until the children are ready to retire to pass on wealth, when they could really do with the help right now?
This vision was already changing pre-pandemic, not just for the super wealthy but for the more modestly affluent, with the property market being a significant driver. Considering that in April 2019, the average house price in the UK was £229,011 1 against an average annual income of £30,420 2, it is no surprise that the bank of Mum and Dad has been playing a major role in supporting people getting on the housing ladder. Indeed, a 2017 report from the social mobility commission suggested 34.1% of first-time buyers had financial help in the form of a gift or loan from parents, whilst 9.6% used inherited money3. Put another way, whilst an inheritance in the traditional form can certainly help some people, far more people can’t or don’t want to wait for their parents to pass away before buying their first home.
There is of course a divide between the haves and have-nots here, and there are many ways to demonstrate it. For example, research by the Institute of Fiscal studies suggests that of those born in the 1980s, graduates have parents with about 70% more wealth than people with qualifications no higher than GCSEs4.
Meanwhile, the eye-watering national deficit being built up suggests it is not a question of if, but when, tax rises will be introduced. Whilst the form of any new taxes is still to be confirmed, discussion in the media about concepts such as a potential wealth tax may well spur more families to review their financial position. The idea of reforming taxes on inheritance specifically is also not new and something that was definitely up for discussion before COVID-19 hit. Both the Office of Tax Simplification (OTS) and the All-Party Parliamentary Group for Inheritance and Intergenerational Fairness (APPG IIF) published recommendations for reform: pre-pandemic. The Government is yet to announce any decision, but surely inheritance tax (IHT) is at least up for consideration – whether by increasing tax on transfers, removing or reducing a benefit such as Business or Agricultural Property Relief, changing thresholds, or some other combination of reforms.
Clients considering gifting to loved ones need advice. The starting point is a basic understanding of the available exemptions. For many families this may be sufficient for them to provide support for future generations in a ‘new-normal’ definition of inheritance. Those wishing to pass on higher amounts certainly need more in-depth guidance. Although tax is a feature of all of our lives it is not necessarily the driving force for families making major decisions about how they support each other, and nor should it be. Many parents give money to their children to help them to buy a house, and that is a more important driver than fears of inheritance tax. But, the order of events and the potential tax consequences of a client’s actions need careful evaluation, because actions generate tax liabilities that can and should be planned for. Gifting strategies need to be explored, including the use of Trusts. Although a wish to make one-off gifts at key life stages may be the trigger for the conversation, families should consider if a longer-term strategy may be appropriate. This could include, for example, making use of the gifts from normal expenditure out of income exemption (by gifting ‘surplus’ taxable income). Another key consideration is financial provision for the future. Whilst in the current situation it may be the older generation with surplus assets, in the future they may face new financial challenges, such as care costs. In this situation a Trust that can make payments to the Settlor may be appropriate.
There is plenty we have learnt this year. Having something taken away can certainly make you appreciate it – as many children who missed six months of education can attest to. As we look forward to a New Year that offers a new optimism, we can expect more families to look at how they can support each other in the near, not distant, future, not least financially. Advice teams can make sure they are ready and prepared to help them do so.
References
1. https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/january2020.
4. https://www.ifs.org.uk/publications/14954
