Protecting your wealth for the next generation

IHT Planning
Careful estate planning offers an effective means of reducing your IHT bill.

People are living for longer and building up larger nest eggs as they go. What is also clear is that more and more of this wealth is being lost to inheritance tax (IHT). Careful estate planning offers an effective means of reducing your IHT bill.

A report published on the 16th January 2017 by the Resolution foundation, found that the average life expectancy has risen from 63 a century ago to 93 for those born in the last 15 years. The evidence would suggest that older people are accumulating more wealth. The Institute for Fiscal Studies (IFS) estimates that between 2003 and 2013, elderly households saw their average wealth increase by around 45% and that 72% of these households now expect to leave an inheritance, up from 60% a decade ago.

This increase in wealth is reflected in the rise in property prices. The UK House Price Index shows that the average property value in England stands at £234,278, up 7.2% on an annualised basis, while the average price of a home in London is £481,648 – up 8.1%. The Office for National Statistics (ONS) estimates that, on average, house prices have increased by 7% per year since 1980.

Between 1991 and 2014, homeownership levels rose among older age groups. However, there was a sizable downturn in the 16-24 age group, where home ownership fell from 36% in 1991 to just 9% in 2014, according to the ONS. Research by the IFS recently found that younger people are at risk of being less wealthy at each age than those born a decade earlier. People in their early 30s now have half the wealth people in their 40s had at the same age.

This generational divide makes it all the more important for older individuals to make a plan to ensure their assets are effectively transferred to future generations. This has been complicated by the fact that rising inflation and a nil rate band for IHT (which has been frozen since 2009) has left more people exposed to the 40% tax inflicted by IHT.

The threshold for inheritance tax (IHT) is currently £325,000, and the outstanding allowance can be added to your partner’s in the event of your death. So it is possible to end up leaving £650,000. The transfer doesn’t happen automatically and it must be claimed in the event of a partner’s passing.

Inheritance Tax receipts were around £4.7bn in 2015/16, representing an increase of 22% on the previous year and the largest sum on record. There are going to be changes to the inheritance tax rules from April 2017 that individuals should be aware of and that may help.

From April, the residence nil rate band (RNRB) comes into effect, and will apply to the family home when it is passed on death to direct descendants. This will start out at £100,000 in 2017/2018, rising to £175,000 in 2020/21. It will then increase in line with CPI for subsequent years. As with the existing nil rate band, any unused RNRB can be transferred to spouses or civil partners.

When RNRB reaches £175,000 in 2020/21, and is combined with the existing nil rate band, this would provide a couple with a total nil rate band of £1m.

However, this “family allowance” will come with its own set of limitations. Only one residential property will qualify and only where it isn’t worth more than £2m. For any estates worth more than £2m, the band will be tapered off at a rate of £1 for each £2 it is over the limit. Additionally, the RNRB can’t be transferred to anyone who is not the spouse or civil partner of the deceased, even if they lived together and jointly owned the property.

There are several ways to pass on wealth without falling victim to IHT. For example, a reduced rate of 36% applies on certain assets if you elect to leave 10% to charity in your will.

Gifting can also be used to reduce the IHT bill and let others benefit from their inheritance early. An individual has an annual exemption of £3,000 in each tax year and this can be carried over to the next year, for one year only. The smaller gifts allowance permits as many gifts of up to £250 per person, as long as another exemption hasn’t been used on that same person.

For larger gifts to be exempt from IHT, a 7 year rule applies. If the benefactor dies within 7 years of gifting, a sliding scale of IHT is applied to the assets in question. After 7 years have passed, however, the gift will not be subject to IHT.

If the estate is liable, a life insurance policy can potentially be used to pay the tax bill on death. By placing the policy in Trust, the benefit amount payable won’t be included as part of the estate and be subjected to IHT.

Those approaching or already in retirement will want to be sure that the wealth they have spent a lifetime building up goes to their persons of choice. It is important to take a considered and holistic approach to estate planning in order to get the best outcome.


The above article was first published by Charles Stanley on 13th February 2017.