A new study by TIME Investments, a leading provider of estate planning services, shows that just 22% of 55–64 year-olds know what their Inheritance tax liability will be on their estate (property, money and possessions) when they die.
Of this age group, just 8% said that they have taken action to ensure they don’t pay more IHT than is necessary. This is despite 30% estimating their estate would be worth more than £325,000 – the current nil-rate band – and almost a fifth estimating that the value is worth more than £500,000, which is the current allowance with the residence nil-rate band.
Of those who have taken steps to minimise their IHT bill, setting up trusts where certain members of the family can receive the assets was the most popular measure, followed by use of the Residence Nil Rate Band (RNRB) for homeowners and nominating beneficiaries for pensions. Surprisingly, gifting, a very straightforward measure, was the fourth most used rule. Furthermore, only 20% of over 55s said that they would seek advice from an expert about their IHT planning.
The findings come as IHT thresholds are frozen for a further two years until April 2028, meaning even more people will be caught in the IHT net. This follows record IHT receipts of £6.1 billion for the most recent tax year 2021/22, an increase of 14% on the previous year and the largest single-year increase in five years.2 With the Office for Budget Responsibility (OBR) predicting that this trend will continue, Inheritance Tax is a major concern for many families already under pressure from the rising cost of living crisis.3
Commenting on the study, Henny Dovland, TIME Investments’ IHT technical specialist said:
“The announcement that IHT thresholds will be frozen means that even more people will fall into the IHT net, yet our research shows that very few understand what their liability is, and even fewer have taken steps to ensure they don’t pay more than is necessary. There is a huge opportunity for professional financial advisers to help clients and potential clients in this area, which can often be complex and confusing.”
Henny offers some thoughts on IHT planning:
· Think about how much income is required in retirement and how long this income needs to last.
· Where there are surplus assets IHT planning could be considered. There are several tax efficient ways to pass assets to descendants, but these have different constraints and obligations.
· One route may be to pass cash to family members. However, aside from the use of small and annual gift allowances, larger gifts will typically take seven years to fully fall outside of the taxable estate. It also means those doing the giving lose total control of the money.
· A more complex option, but with greater constraints on the recipients, is to set up a trust which is exempt from IHT. However, as with gifting, once the assets are in the trust the individual loses control.
· An alternative tax efficient option is investing in shares that qualify for Business Relief (BR) which can offer 100% IHT relief in just two years.
· The nil rate band has been stuck at £325,000 for over ten years, meaning anyone with an estate exceeding that figure could be liable for IHT. Clearly this is an issue given the upward trend in house prices. In response, the Government introduced the Residence Nil Rate Band (RNRB) which now allows homeowners with children or grandchildren the potential for an additional £175,000 before they are subject to IHT.
· Only direct descendants qualify for RNRB. Married couples leaving their assets to each other may transfer the RNRB to the surviving spouse allowing them to use up to twice the tax-free amounts available to a single individual.
Pensions and ISAs
· Flexible pensions can be another tax efficient way of passing money down through the generations. If the pension scheme member dies before age 75, their nominated beneficiaries will not have to pay any tax on withdrawals, whether as an income or lump sum. If the pension member dies after age 75, pension assets become taxable at the marginal rate of income tax of the recipient.
· ISA holdings still form part of the taxable estate for IHT purposes. A surviving spouse or civil partner can inherit ISA funds from their deceased partner or make an additional ISA subscription up to the value of their deceased partner’s ISA holdings. It is possible to invest ISA funds in AIM listed companies that can qualify for 100% BR relief after two years of ownership.
Top tips for effective intergenerational financial planning
1. Start intergenerational planning early to avoid time restrictions
2. Consider the wider family and younger generations
3. Understand financial planning strategies that can benefit several generations simultaneously
4. Think about including Business Relief as part of IHT planning
5. Use the RNRB to full effect
6. Revisit trusts to assess their effectiveness for today’s families
7. Use pensions as an efficient means of protecting the legacy
8. Ensure clients do not pass on too much too soon and lose control or become dependent
9. Review everyone’s circumstances regularly