- One person in twenty five expect to inherit an estate over a million pounds, with one in fifty expecting over £5 million
- Tax on a £1 million estate of around £230,000 if there’s no inheritance strategy – the equivalent of an average UK home
- Larger estates in danger: only one in 20 know about the residence nil rate band tapering for estates over £2 million.
- Around one in four people (24%) expect an inheritance of £250,000; around one in seven (15%) expect over £500,000
*Canada Life’s Annual IHT Monitor1
One person in 25 expect to become ‘million-heirs’, and inherit an estate worth £1 million or more, according to Canada Life’s annual Inheritance Tax Monitor survey of people over 45. Around one person in 50 expects to inherit more than £5 million.
The figures reveal the financial impact of the UK’s massive wealth increase in recent decades, with rising stock markets and increased property values contributing to larger individual wealth and the expectation of substantial inheritances.
However, without financial planning much of the estate is likely to be lost in inheritance tax (IHT), which is currently 40% for assets above the available nil rate band threshold. On an estate worth £1 million, over one fifth (£230,000) would be lost in inheritance tax, or roughly the equivalent of an average UK house price.
Compounding the problem is the lack of knowledge around the IHT rules. The majority of people (70%) could not identify the standard nil rate tax threshold (£325,000). Meanwhile only one in 20 of those surveyed knew about the residence nil rate band tapering for estates over £2 million, likely leading to greater tax bills for larger inheritances.
Karen Stacey, Head of Distribution Services, at Canada Life said:
“People’s expectations are likely to be substantially wrong without financial planning, and it’s quite likely they could lose substantial amounts of money in tax. Yet it’s quite possible to ensure that, by using a straightforward trust, the entire amount goes where it is intended - the beneficiaries.
“For people expecting around £500,000 or more in inheritance, there is still a danger of losing tens of thousands of pounds in tax. It’s very much worth their while talking to a professional adviser or planner to make sure there’s a sound financial plan at work. The risk of a big IHT bill drops to zero at the inheritance tax threshold of £325,000, below which there is no tax.”
Jonathan is 60 with an estate worth £1 million made up of pensions (£154,000), life assurance (£100,000), collective portfolio (£46,000), investments (£300,000) and property (£400,000).
After consulting a professional adviser, he writes his life assurance policy into trust, puts £300,000 into a flexible reversionary trust2, enabling him to maintain access to the money. He also gifts £3,000 tax free to his niece from his collective portfolio each year, while his pension isn’t counted as part of his estate for IHT purposes. Jonathan passes away after seven years, meaning that the remainder of his estate falls below the IHT threshold, ultimately resulting in his entire estate going to his beneficiaries.
Without using a financial strategy around £230,000 would have been paid in tax from the estate.
If you expect to receive an inheritance, how much is it likely to be?1
|Up to £100,000||8%|
|£100,000 - £249,999||7%|
|£250,000 - £499,999||9%|
|£500,000 - £749,999||5%|
|£750,000 - £999,999||6%|
|£1,000,000 - £5,000,000||2%|
|More than £5,000,000||2%|
|I do not expect to receive any inheritance||49%|
|I do not know||11%|
1 Survey of 1,001 UK consumers aged 45 or over with total assets exceeding the standard inheritance nil rate band of £325,000. Carried out in October 2017. Percentages may not add up to 100 due to rounding or multiple answer questions. Research conducted by Atomik.
2 The person taking out the trust must survive seven years after making the gift into the trust for the gift to become totally exempt from the estate.