According to the latest research, the majority of over-50s don’t understand essential Inheritance Tax terminology. Furthermore, this lack of financial education could result in them passing on less than they expect.
The research found that, of the over-50s surveyed:
- Fewer than 30% understood key Inheritance Tax terminology
- Only 27% were able to correctly identify that ‘nil-rate band’ referred to the threshold at which an estate became liable to Inheritance Tax and that this threshold is set at £325,000
- Only 44% were aware that the current rate of Inheritance Tax was 40%.
With the Government announcing record Inheritance Tax receipts of over £5bn in 2017/18 (that’s an increase of over 50% since 2014), there are fears that people could be failing to minimise their tax liability correctly.
Rising property prices are impacting Inheritance Tax liability
An increase in property prices across the UK has meant that more and more people are now liable for Inheritance Tax.
Since 2009, the tax has been set at 40% on all assets over the £325,000 threshold; despite the fact that house prices have rocketed over the past ten years. What this means is that Inheritance Tax now hits an increasing number of estates. Before 2009, the threshold was set each year to reflect inflation and rises in overall asset prices.
As such, it’s perhaps no surprise that forecasts from the Office for Budget Responsibility (OBR) show that the number of estates on which Inheritance Tax is paid has more than quadrupled over the last seven years.
It’s also important to note the introduction of the residence nil-rate band (RNRB) last year, providing an additional inheritance tax allowance for individuals who leave their main residence to lineal descendants.
The additional allowance is to be brought in gradually, increasing by £25,000 on an annual basis. The amount began at £100,000 in 2017/18 and eventually grow to £175,000 in 2020/21.
In total, as this is on top of the current threshold, this amounts to an allowance of £1 million for a couple.
The problem facing the over-50s
With Inheritance Tax affecting more people than ever before, it is vital that the over-50s are fully informed about this topic. Worryingly, however, the latest research shows that this is not the case. As a result, it is likely that families will lose out while the Government benefits.
But there are ways to reduce a person’s Inheritance Tax liability (e.g. by using ISAs, a deed of variation, discretionary will trusts, etc.). So, it is vital that careful and professional estate planning is carried out to ensure assets are left to family members rather than the taxman.