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Rules around inheritance tax (IHT) can be complex and difficult to comprehend, a fact that was recently borne out by two new pieces of research, which found evidence of a general lack of understanding on the matter.
One area of confusion identified by the research was around living legacies. A study by wealth management company Brewin Dolphin found that many older people would like to provide more financial help for children and grandchildren, but around 32% don’t know how much they can gift each year without incurring IHT.
On average people apparently believe they can gift £1,575 a year without being left with a tax bill, but in reality people can gift £3,000 a year without incurring IHT. In fact, only one in ten (12%) respondents correctly stated that they can give away around £3,000 a year.
The research suggests that UK adults would be more inclined to pass on their wealth if they could gift more money tax-free. For instance, more than two fifths (44%) of UK parents and over a third (35%) of grandparents would gift more money to children while alive if they were able to do so tax-free.
Leaving living legacies may become more popular if people had greater awareness of IHT limits, as four out of ten (40%) people don’t feel confident that they understand rules around gifting, with women feeling the least confident (47% women v 30% men).
“Inheritance tax can be incredibly confusing, so it’s not surprising to hear that many people are unsure how much they can gift each year,” commented Liz Alley, Head of Financial Planning Operations at Brewin Dolphin. “It is music to my ears that the Chancellor recently wrote to the Office of Tax Simplification for a review of inheritance tax to ensure the system is “fit for purpose”. It’s clear from our research and from speaking to our clients that the system needs looking at.”
The second piece of research into IHT was conducted by Canada Life and found that 70% of adults over the age of 45 with assets in excess of £325,000 don’t know the threshold for the standard nil rate band (£325,000). This is an increase over 2016, when 61% reported the same.
In addition 55% of people do not know the rate at which assets above their available nil rate band are taxed, up from 52% in 2016. Canada Life warns that this confusion could result in families finding themselves facing unexpectedly high tax bills.
The Government is receiving every increasing amounts of revenue from IHT. In the 2016/17 tax year, it received £4.84 billion of IHT, more than double the £2.4 billion it received in 2009/10 tax year.
“Unless people learn more about taxes and actively plan the future of their estate, the Government is in line for a large, ongoing and often unnecessary windfall,” said Karen Stacey, Head of Distribution Services, at Canada Life. “Yet by taking a few simple steps this can often be avoided, ensuring that people’s estates go exactly where they want it to. Seeking professional estate planning advice early on is a key step which can help families and individuals avoid the typical inheritance tax pitfalls and unexpected bills.”
For expert legal advice on estate planning and inheritance tax then contact our specialist private client solicitors today.
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