Our own research found that more than one fifth (22 per cent) of parents say the cost of living has affected their wealth transfer plans, with more than a quarter (26 per cent) saying they are now expecting to leave nothing at all.
Others have accelerated their inheritance plans, with over seven in 10 (72 per cent) whose plans have changed saying they have either already, or plan to, pass on money to their children early.
In the Autumn Statement, a number of stealth taxes, threshold changes and cuts to tax-free allowances were announced, which will soon mean more taxes for all and impact wealth transfer plans for many.
The looming prospect of recession is a key concern for those contemplating changes to their wealth transfer plans. It is natural that during times of financial uncertainty, individuals tend to act more cautiously as worries, including job security, increased living costs and the prospect of investments underperforming, weigh on their minds.
But for parents there is the added concern of how their offspring will fare. While a third (33 per cent) of parents worry about the ability of their children or grandchildren to cope, distressingly for them around one in ten (13 per cent) are no longer in a position to help them financially. In fact, a tenth of parents say they are currently receiving financial support to help with higher living costs.
For the fifth (20 per cent) of parents who say they can cope with the current impact on their finances, they may be more able to support family members who are otherwise struggling or take advantage of deflated prices, such as in the property market.
However, for others the pullback in valuation causes individuals’ own needs to be reprioritised, reducing or delaying plans for future gifts.
There is another more worrying outcome. This is when parents neglect to factor in their own needs, or consider the long-term implications of inheritance changes, before helping their children.
Nothing lasts forever
While we are seeing a shift in inheritance planning behaviour as a result of today’s economic uncertainty, these changes are unlikely to be permanent. History has a habit of repeating itself and many current trends are mirroring 2009, when the UK last entered recession.
The Office for Budget Responsibility has forecasted that the UK’s current recession will last until 2024, so we can expect that any behaviour changes will take around the same length of time to revert back to what they were.
As with the previous period of recession, many with the greatest level of wealth are already retired and we are therefore likely to see increased levels of financial support provided down the generations to support the rising costs of living.
As well as increased gifting of assets, decreases in property values could be advantageous for reducing capital gains tax bills.
We are certainly seeing examples of clients changing their plans. For example, a widow with children, grandchildren and great-grandchildren capitalising on the lower value of a holiday home is now planning to gift this property in the next year to generate a lower CGT bill on the transfer and therefore maximise the amount of her estate that should make its way to her descendants.
It will also allow her to watch them enjoy the property during her own lifetime. However, due to the financial constraints on some of her descendants’ families, she will need to gift some cash at the same time to ensure that the holiday home costs are not problematic.
We have also seen instances of 'just in case' planning scenarios, where retirees with descendants are considering portfolio liquidity to ensure they are in a position to potentially support one or more of their children, should they need assistance.
Inheritance plans can also be impacted by changes to circumstance that become more probable during a recession, such as divorce or redundancy.
At the moment it is early days and the labour market is still strong, so we would expect to see any uptick start to emerge in the new year.
The rest of 2022 will likely impact inheritance and wealth transfer plans as a result of the Autumn Statement, and other government announcements.
The rise of taxes
Given the rising cost of living and inflation running so high, many will be relieved that the chancellor has confirmed the pensions triple lock.
This has the potential to provide higher incomes for pensioners, enabling them to gift excess income, though ultimately this will likely be marginal in the grand scheme of things.
In addition, a number of stealth taxes via tax-free allowance freezes, plus the lowering of the new 45p income tax threshold to £125,140, will see an increasing number of people paying more tax, particularly as wages increase.
The inheritance tax freeze extension to 2028 will bring more estates into the scope as property values increase, despite the predicted housing market slowdown.
In fact, it is worth considering whether to expedite your wealth transfer plans in order to mitigate the impact in the near future.
Furthermore, the chancellor has pursued cuts to CGT and dividend allowances, which will impact investors, business owners, and entrepreneurs.
These measures will also reduce the effectiveness of the use of investment companies as an inheritance tax planning tool.
However, while interest rates are not keeping up with inflation, it is possible that the resulting increased return on cash could mean those who are holding large sums may be less willing to give it away as it provides an additional income source.
Given the uncertainty of the current environment, in particular recession, cost of living and legislation changes, it is as important as ever to speak to a professional adviser.
When making large lifetime decisions, such as inheritance tax planning, it is important to note that many decisions have long-term implications and they must be reviewed regularly to ensure that any changes in circumstances, and legislation, are incorporated and make the most financial sense to all involved.
Will Stevens is head of financial planning at Killik & Co
