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Letting your heir down?

Britons are ignoring estate planning tools that could help them to pass on more of their estate to the next generation.

Over recent years, property inflation and rising asset values have combined to push a higher proportion of estates over the nil-rate band for Inheritance Tax (IHT).The new residence nil-rate band, to be introduced in April, will help to a degree, but with the IHT threshold frozen at £325,000 per individual until at least 2021, and government receipts growing by a fifth in the last year1, there’s evidence to suggest that IHT is not a tax just for the rich – or even moderately wealthy.

Despite the fact that more estates are paying ‘death duties’, relatively few people understand the rules around IHT and even those who do often forget or ignore ways to prevent their families paying over the odds. For example, the exemption which allows anyone to give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of their estate, is being overlooked by the vast majority of people with sufficient assets to trigger an IHT liability when they pass away.2

According to a recent survey by Canada Life, only a fifth of respondents aged 45 or over with assets worth more than £325,000 said they had gifted money, and almost a third said they had no intention of doing so, which could result in their families paying more IHT than they need to.2

Another way to minimise the impact of IHT is to take out a ‘whole of life’ insurance policy. This pays a lump sum on death, and when the policy is written in trust, the pay-out can help offset or eliminate an IHT bill. Yet almost half of those with a potential IHT liability said they would never take out life insurance and nearly three quarters said they didn’t see a need to use it, indicating an acute lack of understanding.2

Heir care

Whilst this is good news for the Treasury, which relies on such inertia and ignorance to ensure its tax receipts, the widespread lack of knowledge will worry many potential heirs – and for good reason. But taking the appropriate advice can go a long way to alleviating those concerns.

A financial adviser can help families with the transfer of wealth in an orderly and tax-efficient manner, establishing trusts*, life insurance and so on, while also ensuring that the person who is arranging their estate has enough income to maintain their normal standard of living.

With the right advice, more estates could be removed from the grip of IHT and bereaved families could be spared the extra heartache of paying unnecessary tax. Despite this, just 27% of those with a potential IHT liability have sought professional financial advice on estate planning.2

Perhaps most worrying of all is that over a quarter of respondents said that they did not have a Will*, which means that much of their wealth could pass to individuals they may not have intended providing for.

“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,” says Karen Stacey, Head of Technical Services at Canada Life.

“There is 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 says.

“With the end of the tax year fast approaching, acting now rather than later could potentially reduce their IHT bill.”


*Trusts and Wills are not regulated by the Financial Conduct Authority.

1 HMRC, 29 July 2016
2 Canada Life, September 2016; survey of 1,001 UK consumers aged 45 or over with total assets exceeding the individual Inheritance Tax threshold (nil-rate band) of £325,000.

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