Who were the real winners from the Budget this week? I’ll tell you who — the offspring of the worried wealthy.
Months of speculation about potential tax rises has proved to be a powerful accelerant for estate planning. There has been a pre-Budget stampede to sell shares, investment properties and even entire businesses to crystallise gains at a lower rate of capital gains tax (CGT).
A great many over-55s have also withdrawn the maximum tax-free cash lump sum from their pensions through fear that the chancellor would end or reduce this perk (she didn’t — though pessimists would argue she still might).
Now flush with cash, many children of the wealthy saw fears of a more draconian inheritance tax regime cause a sudden outbreak of intergenerational generosity.
“Lots of clients have been making very substantial gifts in the run-up to the Budget,” says Christine Ross, client director at Handelsbanken Wealth & Asset Management. One gave each of his children a six-figure sum the day before the Budget. This is not uncommon — other advisers I’ve been chatting to in the run-up to the Budget report similar stories, although the sums involved tend to be counted in the thousands, rather than millions.
Some families had planned to pass down money eventually, but hastened their plans, fearing that any changes to IHT rules could restrict their ability to make lifetime gifts, or extend the “seven-year rule” (if you survive for seven years after making a gift, no tax is due).
While there were no changes to these rules, other plans announced on Budget day will alter the inheritance tax treatment of pensions in future, and tighten reliefs for those passing down family farms, businesses and Aim shares.
If I had just given one of my stepchildren a million quid (dream on, Barrett!) might I be regretting my actions this side of the Budget? One of the reasons parents delay this moment is they want to be certain that their offspring will be able to handle coming into a lot of cash. Once you’ve given it away, it is no longer your money.
Will some regret their largesse? I doubt it. Judging by how the gilt market is digesting the news, there are already fears that Rachel Reeves could launch further tax-raising measures next spring.
According to Ross and other advisers I have spoken to, it is the property purchase a gift could unlock that prompts the majority of parents and grandparents to get the cheque book out. Even wealthy families can see how hard it’s going to be for the next generation to get on the ladder.
The sad fact is, inheritocracy is the only feasible route to owning a property.
“In London and the south-east, it feels like almost every first-time buyer client has had some kind of help from their parents or grandparents,” says Andrew Montlake, chief executive of Coreco, the mortgage broker.
Although buyers funded by the Bank of Mum and Dad have to disclose the size and source of a gifted deposit when applying for a mortgage, this is not information most British people would ever share with their friendship group. The role of parental contributions is understood — how else would your friend working for a creative arts charity be able to buy a two-up, two-down in the grottiest of London neighbourhoods? But it is rarely spoken about.
When I chatted to estate agents this week, they said they’re expecting a wave of first-time buyers fuelled by pre-Budget windfalls and the desire to transact before the end of March, when stamp duty discounts will be reduced.
As property prices tick up, those without parental backing may well wish the chancellor had tried harder to clip the intergenerational coupon and plough IHT receipts into solving the housing crisis.
However, it’s not all about buying a property. Parents and grandparents also want to ensure that their heirs will inherit the skills needed to invest their money for the long term.
Netwealth has seen a fourfold increase in the number of investors taking the tax-free cash from their pensions this year, with the average amount withdrawn a hefty £190,000. Many have used the platform’s network model to transfer the cash into the names of adult children in their 20s and 30s.
“There has been a massive increase in people bringing forward gifting and moving money into their adult children’s investment accounts,” says chief executive Charlotte Ransom. Deciding how to invest the cash is the next challenge, and the platform’s young investor days for 18-28 year olds are hugely popular.
But the recipients of large gifts extend much further up the age spectrum. “We do have a lot more adult children joining meetings now, and it’s something we encourage,” says Carla Morris, financial planner at RBC Brewin Dolphin, pointing out that adult children can sometimes be in their 60s. However, that’s not to say that the gifting process is trouble free.
Not having come from money myself, I find it oddly fascinating how divisive the subject can be within families. Common problems include fallout when (for whatever reason) parents decide to help one child more than their siblings. Wanting to keep gifts out of the clutches of partners who are deemed unsuitable is also common. Fearing that your children could burn through the cash too quickly is a reason many affluent families favour Junior Sipps over Junior Isas, as money in the latter passes to the child at the age of 18.
Ross says it’s more common for parents to fear that transferring significant amounts of wealth to their children too early may demotivate them from pursuing careers and reaching their own potential. For this reason, many families prefer to use trusts.
“Neither trusts nor family investment companies offer a free lunch from a tax perspective, but they offer a sensible means of exercising control of wealth transferred to younger family members,” she says.
Morris adds that it is not uncommon for adult children to refuse gifts (this could be down to family dynamics, or because they feel their parents should enjoy their own money). Similarly, gifts can be made with good intentions, but life events further down the line might force parents to ask for it back.
Changing the IHT treatment of pensions could prompt retirees to spend or give away money too quickly through fear of incurring double taxation (IHT and income tax on withdrawals) after they die. This is less of an issue for the seriously wealthy, who had been planning to use pensions as a vehicle to transfer wealth tax efficiently between generations. But it is going to prompt a strategy rethink that could see even more money gifted to start the seven-year clock ticking, and more families taking out life insurance policies to cover eventual IHT bills.
If you’re lucky enough to be able to leave your family a legacy, this is definitely a piece of planning you should not overlook.
Claer Barrett is the FT’s consumer editor and the author of ‘What They Don’t Teach You About Money’. claer.barrett@ft.com Instagram @Claerb
