Brits are sleep-walking into an inheritance tax nightmare

Simon Rogerson
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Only 8 per cent of people knew that Isa savings can form part of a person’s taxable estate and could therefore also be subject to inheritance tax (Source: Getty)

If you've been fortunate enough to accumulate significant wealth during your lifetime, then you still face one major headache: you can’t take it with you.

Yes, estate planning is in the headlines once again, with the news that David Cameron’s parents wanted to pass on more of their wealth to him, rather than leave it to the taxman. But all this reveals is that, in this respect, the Camerons aren’t that different from the rest of us, although most of us don’t have to worry about having our family finances released to face public scrutiny.

The bigger issue is that very few people understand the rules relating to inheritance tax. Research commissioned and published in February by Octopus Investments revealed a fundamental lack of awareness and understanding. For example:

  • Just 14 per cent of the people surveyed were aware that the current inheritance tax-free allowance for individuals is only £325,000. If the estate is worth more than this, the remainder will be taxed at 40 per cent.
  • Nearly one in three homeowners (29 per cent) aged 70-plus hadn’t considered estate planning or thought about ways to reduce or eliminate the inheritance tax bill they would leave behind for their families.
  • Only 8 per cent of those surveyed knew that Isa savings can form part of a person’s taxable estate and therefore could also be subject to inheritance tax.

Not just for the super rich

HMRC has just announced a record take of inheritance tax for the last tax year, with £4.6bn due to be collected from the estates of thousands of people who have passed away.

And inheritance tax receipts are forecast to keep rising. The Treasury expects annual inheritance tax receipts to top £5.6bn by 2021. This is despite the coming introduction of the new supplemental inheritance tax allowance of £175,000 per person, which applies to estates that include a family home and is due to be phased-in over the next few years.

And if you think that inheritance tax is a problem only the super-rich have to worry about, think again. The £325,000 threshold is woefully inadequate when you compare it with the average price of a property within half an hour’s train ride from London, which now stands at £458,000.

No surprise, then, that more people are sitting on a potential inheritance tax liability, and are either unaware or unsure of what to do about it. Moreover, the majority of families caught in the inheritance tax trap aren’t anywhere near as wealthy as the Camerons. Some could be forced to sell the family home to settle an inheritance tax bill, even with the new £175,000 allowance.

Looking after your family

Of course, this all happens at a time of intense personal stress and grief, precisely the wrong moment to be making life-changing financial decisions. In this context, there’s nothing wrong with using estate planning to take care of your family’s future – in fact it should be openly encouraged.

Gifting large sums of money to family members is a common approach used by thousands of people each year. But it’s not the only way to reduce or eliminate an inheritance tax bill. There are a range of other options now available, without having to go offshore.

For example, the government offers tax incentives to people that are interested in investing in small, unlisted companies, and are willing to accept the risks that go along with such investments. These incentives are aimed at encouraging greater investment into small businesses that are providing significant benefits to the UK as a whole, both in terms of job creation and economic prosperity. But with this choice comes the need to talk to a professional financial adviser.

Our research suggests that, rather than being a nation of inheritance tax avoiders, most of us are collectively sleepwalking into leaving our loved ones with a large and unnecessary tax bill to pay. Estate planning can be complicated, so getting some advice that focuses on well-established government-approved estate planning strategies can make a real difference.

The alternative, burying your head in the sand and just doing nothing, could prove to be a costly mistake that your family lives to regret.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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