88% of parents plan to pass on wealth to their children and grandchildren in a will, but 59% haven’t written a will yet
The rise in value of housing and other assets means inheritance tax can also potentially be a dampener for many estates. In fact Government figures shows that inheritance tax receipts during the tax year 2020 to 2021 were £5.4billion*, but it is relatively simple to minimise this with some careful planning.
As of June 2022, when someone dies without estate planning or a valid will in place, there could be large inheritance tax bills to pay if the value of a person’s estate exceeds £325,000. Estate planning can save people a huge amount of tax and ensure your family receive a financial legacy you want them to have. Inheritance Tax is usually charged at 40% on anything above the nil rate band – so the potential tax savings most likely exceed the cost of taking financial advice.
Although research from our Wealth and Wellbeing Research Programme** showed that 43% of parents didn’t plan to speak to a financial adviser about the best way to pass on their wealth, financial advice could help navigate the options that are available and ensure that you have done things like writing a will, use gifting allowance or put assets into trust.
People have several options to reduce inheritance tax liabilities including:
Up to £3,000 can be gifted each tax year and is immediately outside your estate for inheritance tax purposes (up to £6,000 if the exemption wasn’t used in the previous tax year). Other gifts will normally only fall outside your estate if you survive for seven years after making them.
Most pension pots will not be part of your estate for inheritance tax purposes, so it can be beneficial to consider spending other assets first.
If you have more income (pension or otherwise) than you need to maintain your normal standard of living and you regularly gift the excess income away on a habitual basis, these gifts could fall under the ‘normal expenditure out of income’ inheritance tax exemption. This means that they won’t be chargeable to inheritance tax even if you don’t survive seven years after gifting. (It is best to seek professional advice if looking to rely on this exemption, to ensure the gifted income qualifies).
If your estate is likely to be liable for inheritance tax, you could consider taking out a whole of life insurance policy placed in trust that will cover the tax bill. Alternatively, if gifting assets to bring your estate below the inheritance tax threshold, a level term life assurance policy that lasts for seven years (the time the gift remains in your estate) may be more appropriate.
If not ready to make outright gifts, the use of trusts allows you to move assets outside your estate, but still retain control over who will benefit and when. As the person setting up the trust, you can’t normally be a trust beneficiary as well. However, there are some trusts (for example, loan trusts) that allow you to retain access to the funds, whilst still offering inheritance tax advantages. When using trusts, financial advice will nearly always be needed.
*These statistics are from our Wealth and Wellbeing Research Programme conducted in September 2021 which found that of all grandparents that gave money to their grandchildren:
**The LV= Wealth and Wellbeing Research Programme is a quarterly survey of 4,000 people to understand UK consumers and their attitudes to their personal finances and wellbeing. The statistics shown here are as a result of the survey we conducted in December 2021.