Looking after your family’s wealth

Research highlights a worrying lack of understanding about inheritance tax rules

Understanding inheritance tax rules could benefit both you and your family, especially at a time when more families than ever are dealing with its consequences.

There are fewer more rewarding feelings in life than knowing you are protecting your loved ones. However, when it comes to leaving behind an inheritance for your family, a lack of planning could mean the taxman jumps ahead of them in the queue. Inheritance tax is affecting more families than ever before, with a record amount of tax receipts in the 2015/16 tax year. The Office for Budget Responsibility forecasts sharp rises in inheritance tax receipts over the next five years. Inheritance tax applies if your estate’s value is above your nil rate band of £325,000 if you are single or divorced, or up to £650,000 if you are a married couple or widowed. Everything above this is taxed at 40 per cent and it would usually fall upon your loved ones to pay it, before they can inherit what you want them to have. If they are unable to find the money within six months, interest will typically be charged on top.

A growing problem for our readers

Traditionally inheritance tax is viewed as an issue that only affects the richest people in society but it is becoming more widespread. Most people strongly believe the concept of inheritance tax is unfair, but a survey of those likely to be liable found a huge lack of understanding about the rules. The September 2016 research by Canada Life questioned people aged over 45 with assets worth more than £325,000. 78 per cent of respondents believe wealth should be passed from one generation to the next without any tax being due. 43 per cent expect to leave an inheritance of over £500,000. 83 per cent think the current inheritance tax rules are too complex.

Three quarters of wealthy people are unaware of new inheritance tax rules

The government has acted to reduce the number of estates affected. From April, the new residence nil rate band will be introduced. However, Canada Life’s survey found 75 per cent of wealthy people are unaware of the new rules. Only 4 per cent were aware that the new residence nil rate band will eventually be worth up to £175,000 a person (from April 2020). This is additional to your existing nil rate band; which means married couples will have a joint allowance of £1 million. There are certain restrictions that mean you might not be able to benefit from this new allowance. For example, you can only use it to pass on your home to a direct descendant such as a child or grandchild. Even if you can use it, rising property prices could mean your estate’s value could eventually exceed your nil rate band. Your estate is not just your home; it includes other property, home furnishings, car, jewellery, savings and investments, minus any liabilities like a mortgage. When you total up the value of your estate, you might be surprised by how much it is worth. Future rises in the value of your assets could also have an impact.

Help available to our readers

Canada Life’s research discovered only 27 per cent of people with an estate worth more than £325,000 have sought financial or professional advice.

With some careful planning, you can actually address inheritance tax so your loved ones do not face an unexpected shock. As this is a complex area and the rules are not widely understood, we are delighted to have partnered with Skipton Building Society to offer readers access to personalised financial advice.

By contacting Skipton, you can benefit from an in-depth assessment of your situation. They will help you to establish if inheritance tax is an issue you should be concerned by and you will hear tailored recommendations to address your liability. There is no pressure to act on this advice.

It is important to be aware that some IHT planning solutions may put your capital at risk, so you may get back less than you originally invested. Some areas of IHT planning are not regulated by the Financial Conduct Authority. Thresholds depend on your individual circumstances and prevailing legislation, and they may change in the future.