Shifting through the gears of gifting

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MON, 10 JUN 2019

HMRC’s recent study titled, ‘Lifetime gifting: reliefs, exemptions, and behaviours’ set out to explore peoples’ awareness of Inheritance Tax (IHT) rules and exemptions and to what extent these factors drive gifting behaviour. The results, published in May, gave an interesting steer as to what motivates individuals to gift, and it appears it was not as expected…

For the purposes of HMRC’s study, ‘gifters’ were defined as people who had given any single gift worth £1,000 or more, or multiple gifts of at least £250 totalling £3,000 or more, in the two years prior to their interview. A gift was defined as anything of value, or the payment of an expense, worth £250 or more. Actual gifts to spouses/civil partners or children under the age of 18 were excluded from the above criteria.

The first interesting point of note is that 13% of the adult population were identified as gifters. However, when also including any single gift worth £1,000 or more given more than two years ago, the proportion of the population identified as ‘lifetime gifters’ increased to 27%.

The proportion of gifters varied by; age, wealth, income, marital status, and whether or not the participant had children. If anything, the report backs up what most people would have expected, in that those who make the most gifts are:

• Older people: where nearly a quarter of those aged 70 and over had gifted in the previous two years, compared with 3% of those aged 18 to 29 years.
• Wealthier people: who had assets including property worth at least £500,000, at 33%, compared to 5% where total assets were less than £100,000.
• People with larger incomes: those with incomes of £45,000 or more at 24% compared to 8% of those with an income of less than £17,500.
• People who are married: at 17%, compared to those who were not at 9%.
• People with children (including adult children): at 15%, compared to those without at 7%.

Further analysis found that only age group and wealth were statistically significantly associated with gifting in the last two years, when included in a model that also encompassed income, gender, marital status and whether the gifter had children.

Somewhat surprising, was that relatively few gifters reported being influenced by IHT rules and exemptions, with a mere 1% of gifters being motivated primarily by the IHT rules themselves. The report concludes that, in general, gifting was conducted to support family members as their lives moved through different phases, with IHT and gifting rules being insignificant for most.
Expanding on this, the less wealthy were more likely to make gifts that might allow recipients to manage day-to-day expenditure, such as paying living expenses, or helping to clear debts. Wealthier gifters were more likely to make gifts that were for wider purposes such as paying for education, helping to buy a property, or passing on assets. What is of concern though, is that the less wealthy were likely to fund gifts through borrowing rather than out of income or savings.

The participants in the study also had their knowledge of IHT tested. Only 25% of gifters were classified as having a working knowledge of IHT. However, there was little difference in the patterns of gifting between those who did and those who did not have a reasonable knowledge.

The overall outcome of the study was that it was seen as supporting the view that the IHT rules and exemptions have a limited role in decision-making for the majority of gifters. I find this somewhat contradictory as in the Office of Tax Simplification report on IHT, issued in November 2018 entitled ‘Overview of the tax and dealing with administration’, reported the general public’s concern in having to pay IHT, even when the majority were unlikely to ever do so.

So what’s the steer for advisers?

With 1% of gifters being primarily motivated to make gifts as a means of tax planning, an excess of 4% of estates currently subject to IHT, plus the fact that most individual’s understanding of how IHT works is poor, should create enough of an opportunity for advisers. Nevertheless, it may require a significant amount of encouragement to get their clients who have a potential IHT liability to engage with the issue. This can only be done by ensuring they have a clear understanding of how the IHT regime works, the cost consequences if they do nothing, and what steps they can take to mitigate their liability.

This article first appeared on Professional Adviser

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