Mind the wealth gap: why baby boomers should make lifetime gifts to the young
As baby boomers sail through their lives with comfortable pension pots, it is high time they lend a hand to the struggling new generations, writes Emily Minett.
A quarter of the UK is saving nothing at all according to a report produced by the Centre for Economics and Business Research, who also found that the 18-44 year old demographic is underestimating the required size of its pension pot by up to £550,000. But ‘baby boomers’ (now pensioners) on the other hand, are seeing their income rise faster than the working population due to generous final salary pensions – the current ‘triple lock’ on state pensions that ensures they rise in tandem with earnings.
While baby boomers are set to enjoy a comfortable retirement, the younger generations are unlikely to do so to the same extent. This has led to calls for baby boomers to be incentivised to pass on assets during their lifetimes. However, the same report found that 78 per cent of over-55s who intend to support their family intend to do so through their will.
Other than the wealth gap problem, the issue with waiting until death to pass assets onto younger generations is that the donor's estate is then potentially exposed to a large inheritance tax (IHT) liability. IHT is chargeable on the majority of assets owned at death at the rate of 40 per cent. While each individual has an IHT-free allowance (a ‘nil-rate band’) of £325,000 (transferable between spouses and civil partners), this doesn’t often cover the value of the family home, and for high-net-worth estates, will still leave a significant IHT bill.
The government sought to address this by introducing an additional ‘residence nil rate band’ (RNRB) which will apply from 6 April 2017 when the family home is left to children and other lineal descendants. The allowance starts at £100,000 per individual from April 2017 and increases to £175,000 by 2020, meaning that spouses and civil partners will between them be entitled to a combined nil-rate band and RNRB of £1 million by 2020. However, the RNRB is lost completely if the combined estate is above a certain threshold (£2.4 million in tax year 2016/170). The RNRB will therefore be of little, if any, use to HNW estates.
Lifetime giving could help solve this IHT problem. Assets gifted during lifetime will be outside the scope of IHT on death once the donor survives seven years. With baby boomers reportedly sitting on significant levels of wealth (albeit some of which may be tied up in pension schemes), their estates stand to benefit from IHT savings if they pass on as much as they can in their lifetimes, within their comforts. Interestingly, the report found that only 30 per cent of over-55s who intended to support their family financially intended to make such gifts.
There are various ways to make gifts during your lifetime tax-efficiently. Regular gifts made out of an individual’s surplus income are not subject to the seven-year rule, for example. A gift to a trust will also successfully reduce the estate for IHT purposes on death. There is an IHT cost to creating a trust but not if an individual limits the gift to the trust to the amount of their available IHT nil-rate band, and repeats this limit every seven years.
It is possible that we may hear more on this in the Budget on 8 March 2017 - ideas floated have included gifts to grandchildren being immediately outside the estate of the donor for IHT purposes, and the introduction of a tax incentive scheme that would see a gift of 10 per cent from a donor's estate to their grandchildren reduce the rate of IHT on the donor's estate from 40 per cent to 36 per cent. It remains to be seen whether any of these ideas will be adopted by the government, but younger generations will be hoping that they opt to mind the (wealth) gap.
This article was first published in Spears Magazine on 28 February 2017.