Inheritances left behind are growing – could you be affected by Inheritance Tax?

Inheritances left behind are growing – could you be affected by Inheritance Tax?

Inheritances are growing and becoming more important to household wealth, research finds. As the Inheritance Tax (IHT) thresholds are now frozen for five years, it’s essential those planning to leave money and other assets behind for loved ones consider the impact that tax could have and take steps to minimise it.

According to the Institute for Fiscal Studies, inheritances have been growing as a share of national income in the UK since the 1970s. It’s a trend that’s expected to continue. When compared to lifetime income, those born in the 1980s are expected to receive inheritances that are twice as large as those born in the 1960s. It’s also estimated that those born in the 1980s will receive an inheritance worth 16% of household lifetime income.

This trend is expected for two reasons:

  1. Older generations are holding on to more wealth than their predecessors.
  2. Younger generations are being affected by wage stagnation.

Growing inheritances as a portion of household wealth mean it will play a crucial role in the financial security and freedom of younger generations.

As inheritances grow, more families could be affected by IHT too. Around 1 in 20 estates currently pay IHT, but the chancellor froze thresholds in the 2021 Budget. So, more families could find they face an IHT bill.

When is Inheritance Tax due?

If the value of your entire estate, which includes all your assets from property to savings and material goods, is below £325,000, you do not need to pay IHT. This threshold is known as the “nil-rate band”. If you’re leaving your main home to a child or grandchild, you can also take advantage of the residence nil-rate band. This means you can leave a further £175,000 behind without worrying about IHT.

As a result, an individual can have an estate worth up to £500,000 before needing to consider IHT. If you’re married or in a civil partnership, you can pass any unused allowance to your partner. Effectively, this means as a couple you can leave up to £1 million to loved ones before IHT is due.

Usually, the nil-rate band and residence nil-rate band would rise in line with inflation. However, the thresholds will now remain where they are until 2026. This means that as the value of assets rise, more families will be affected by IHT. With a standard rate of 40%, IHT can have a serious impact on the value of the inheritance you leave behind for loved ones.

6 things you can do to minimise Inheritance Tax

If your estate may be affected by IHT, there are often steps you can take to reduce the eventual bill. However, planning is important to make full use of your options. Here are six ways to manage an IHT bill:

1. Write a will

When putting together an estate plan, writing or updating a will is an essential step to take. It can help ensure you’re making full use of your allowances, for example, specifying that your home is to go to your children to ensure you are eligible for the residence nil-rate band. A will is also the only way to ensure your estate is distributed in line with your wishes.

2. Gift some of your assets now

Making a gift to loved ones during your lifetime can reduce the value of your estate, as well as allowing you to provide financial support sooner. However, not all gifts are considered immediately outside of your estate for IHT purposes, and may be included for up to seven years. Making use of allowances that are outside of your estate immediately can make sense if you’re worried about the impact of IHT. To discuss lifetime gifting and the allowances you can use, please contact us.

3. Use a trust

Trusts can be used as a way to remove certain assets from your estate, so they aren’t included for IHT purposes. In some cases, you can still benefit from these assets. For instance, you may still be able to receive an income from investments placed in trust. Trusts are complex and there are several different types, so it’s important you seek both financial and legal advice before proceeding.

4. Leave some of your estate to charity

You can have a positive impact while reducing IHT by supporting charities. Donations made in your will to a charity are free from IHT. As a result, charitable gifts can be used to bring the value of your estate under the thresholds. If you leave more than 10% of your entire estate to charity, the Inheritance Tax Rate will fall from 40% to 36%. In some cases, this means your beneficiaries will receive more from their inheritance.

5. Take out a life insurance policy

A life insurance policy doesn’t reduce how much IHT is due, but provides a way to pay the bill, leaving your estate intact for beneficiaries to inherit. A life insurance policy would pay out a lump sum on your death. You will need to pay regular premiums for the policy, the cost of which will depend on a variety of factors, including your health and lifestyle. It’s also essential the policy is placed in a trust – otherwise, the lump sum may be included as part of your estate and increase your IHT bill.

6. Spend it during your lifetime

Making the most of your wealth to enjoy your life now could bring the total value of your estate under IHT thresholds. If you’ve been living on a budget, splurging a little can help you reach goals and reduce the bill.

These six options do not make up an exhaustive list of how to minimise IHT. Depending on your circumstances and goals, there may be other options and allowances you’re able to take advantage of. Please give us a call if you’d like to discuss your estate plan and what you can do to reduce Inheritance Tax.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate or tax planning, or will writing.

Over 55s planning once in a lifetime experiences, but could finances hold back aspirations?

Over 55s planning once in a lifetime experiences, but could finances hold back aspirations?

While the mantra might be “life begins at 40”, over 55s are planning to live their life to the fullest as Covid-19 restrictions lift. Retirement might be associated with taking it easy and putting your feet up, but over 55s are planning to explore new places and tick other items off their bucket list in the coming years. However, finances could hold some back.

With more free time and fewer commitments, retirees are finding they have an opportunity to pursue their dreams. According to a Royal London survey, 64% of over 55s are planning to travel more once the pandemic is over, and many others are hoping to tick off once in a lifetime experiences. The survey found the top bucket list items are:

  • Seeing the Northern Lights (53%)
  • Travelling on the Orient Express (42%)
  • Visiting one of the seven wonders of the world (36%)
  • Moving or purchasing a home abroad (25%)
  • Going on safari (22%)
  • Taking a hot air balloon ride (20%)
  • Going to a major sporting event (20%)
  • Driving a supercar (16%)
  • Volunteering for charity (13%)
  • Going to a festival (13%).

How do you want to spend your 50s and 60s?

Thinking about what you want to achieve in your 50s and beyond can set you on the right track for reaching your goals. Whether you want to travel more in the next few years or spend time on a hobby, creating a plan means you’re far more likely to be able to tick off your aspirations and live the lifestyle you want.

Setting out your goals now means you can put a plan in place to achieve them. While the research found over 55s are keen to carry on experiencing new things, it also discovered they could be held back.

Nearly half (43%) of over 55s said they’d regret not achieving their bucket list items. A third (36%) cited lack of money for the reason they haven’t yet achieved goals. For others, work and family commitments, or poor health was holding them back.

Making your goals part of your financial plan can mean you have the confidence to pursue them.

Do you have enough to complete your bucket list?

As you retire, it can be difficult to understand how your assets will create an income. Often, you’ll need to bring together multiple sources of income and consider how your needs will change over decades. As a result, you may not be sure if you’re able to tick off bucket list items without placing your financial security at risk.

Financial planning can help you understand if you have enough to reach all your retirement goals. It can help you understand how all your assets, including pensions, savings, and property, can work together to provide an income in retirement.

However, for those unsure if they have enough for once in a lifetime experiences, the real value of financial planning comes in understanding how their decisions in early retirement will affect the rest of their life. If you withdraw a £30,000 lump sum from your pension to travel the world, would you still have enough for the rest of your retirement? What would happen if you needed care later in life? Would spending now to turn a dream into a reality mean you’d have less choice?

We can help you put these decisions into perspective. Using cashflow modelling, we can help you visualise how spending to complete your bucket list will affect your income in the short and long term. This means you understand the full implications of the decisions you make.

In many cases, we find retirees can meet their goals or that there are steps they can take to release capital from other assets. Financial planning can give you the confidence to pursue your dreams, whether that’s booking an exotic holiday or booking tickets to a sporting event you’ve always wanted to attend.

If you’d like advice as you retire that considers your aspirations, please contact us.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.



Guide: The history of investing and what you can learn from the past

Guide: The history of investing and what you can learn from the past

Investing has been around for centuries and the basics haven’t changed as much as you might think. Technology has changed how we invest, but some of the investment lessons from the past are just as relevant today as they were in the 1600s.

Our latest guide looks at the foundations of modern investing, and what you can learn from the past, including:

  • How the first stock markets came to be
  • Why you should focus on the long term
  • Why it’s important to diversify
  • Why it’s impossible to consistently predict market movements
  • How following the crowd can mean you don’t choose investments that are right for you.

Download “The history of investing and what you can learn from the past” to learn more about how investing began and why some of the lessons still apply today.