Families could end up paying tens or even hundreds of thousands of pounds in tax through an ignorance of the rules which can prove costly.
Three fifths of people who face a potential IHT bill fail to realise their estate may be liable, according to a new survey by insurer Canada Life.
Many do not know how much they are likely to pay, with more than half saying they didn’t realise that IHT is charged at a hefty 40%.
The survey, conducted in September 2016 with more than 1,000 UK consumers aged 45 or over with assets exceeding £325,000 responding, found that more than a quarter don’t even have a will and many of those spoken to saying that they “do not need” such tools, Canada Life said in a statement announcing its findings. The figure of UK expats is even greater, as many incorrectly believe they outside the clutches of the UK taxman.
The research found that over a quarter (27%) of those aged 45 or over, with enough assets to trigger a potential IHT bill, do not even have a will, leaving their inheritance plans unclear and meaning their wealth could pass to relatives they did not intend to provide for under intestacy rules.
Another simple and effective estate planning strategy is to gift money to relatives, but just a fifth of respondents had done so with over half (51%) saying they don’t see a need.
Latest figures from HM Revenue & Customs show receipts from IHT have hit a record high. Families paid £4.7billion of IHT in the 2015/16 tax year, up 22% on the previous year, and the figure is expected to rise.
IHT is charged on assets above £325,000 but this threshold has been frozen since 2009 while soaring house prices brought many homeowners into the net. It means IHT is no longer a tax on the very rich, most of whom avoid a bill through careful planning.
The IHT threshold, or nil-rate band, will remain frozen until 2021 at today’s £325,000, which doubles to £650,000 for married couples.
The UK’s third richest man, the Duke of Westminster, died recently but his son will pay little or no death duties on his £9 billion windfall, as most of the estate is protected by tax-exempt trusts.
‘Lack of understanding’
“Far too many wealthy people do not view estate planning as important and risk leaving it too late, thereby potentially placing the burden of substantial bills on their loved ones, said Karen Stacey, head of technical services at Canada Life. “The lack of understanding about different inheritance tax planning tools and their benefits is a concern, and suggests not enough people are aware of the options for protection and passing on their wealth.
“There is also a perception that planning is too complicated and time consuming, which is not the case. Writing a will is an absolute must, while gifting money is incredibly simple. Even options seen as complicated, such as setting up a trust, can be very simple when consumers know who they want to benefit from their estate and get advice from a professional on how to achieve their objectives,” she said.
|Most commonly used estate planning tools (% of consumers that have used them)||Most unpopular estate planning tools(% of consumers that have no intention of using them)|
|Writing a will||73%||Take out life insurance||46%|
|Take out life insurance||37%||Setting up a trust||40%|
|Gifting money||21%||Gifting money||27%|
|Setting up a trust||13%||Writing a will||2%|
Source: Canada Life. Base: 1,001 UK consumers aged 45 or over with assets exceeding £325,000
According to Canada Life findings (see the above box), almost half (46%) of respondents said they would never take out life insurance as part of their estate planning. Nearly three quarters (72%) said they didn’t see a need to use life insurance.
Trusts were the second most unpopular strategy, with 40% saying they had no intention of using them. 19% said setting up a trust was too time consuming or complicated. A significant minority (13%) said they have used them.
While just a quarter have already sought financial advice for estate planning, 43% of respondents expected to leave an inheritance of over £500,000, which exceeds the current individual IHT threshold and would lead those who fail to plan ahead with substantial tax bills for their families. Most people intend to leave their wealth to a spouse (60%) and/or descendants (59%). 29% would also leave an inheritance to other younger relatives, for example, nieces, nephews or grandchildren and 17% would leave money to charity.
‘End of tax year’
“With the end of the tax year fast approaching, acting now rather than later, could potentially reduce their IHT bill,” added Stacey. “There is a strong relationship between the lack of understanding of simple estate planning tools by the wealthy and the lack of take up of financial advice.
“The low use of even very simple estate planning tools shows the important role financial advisers have to play in educating potential clients on every aspect of the estate planning process.”
Have you recently reviewed your estate planning? Do you have a Will that is up to date?