62% of UK adults aged over 45 with assets above the individual inheritance tax (IHT) threshold are unaware that it is set at £325,000, according to research by Canada Life International.
Many people have seen their wealth increase over the last few years because of rising house prices and their families risk facing large unexpected inheritance tax bills, highlighting the need for more financial planning. This lack of knowledge means there is an opportunity for professional advisers to guide their clients on these issues, Canada Life said.
Government forecasts predict that inheritance tax receipts will almost double by 2019/2020 to over £6bn.
The majority of over-45s do not know how their estate will be taxed after death, with only 37% having an understanding of how IHT works.
Only 43% of those with assets above the individual threshold are aware that IHT is levied at 40%. One in ten incorrectly think IHT is levied at a rate of 28% – which would see their families facing a much larger tax bill than anticipated.
Estates can pay inheritance tax at the reduced rate of 36% on some assets if 10% or more of the ‘net value’ of their estate is left to a charity. Only 3% of those surveyed were aware of this, showing the need for increased discussion between professional advisers and their clients about IHT planning.
10% of over-45s with assets over the individual IHT threshold do not know which of their assets are liable for inheritance tax.
House price rises have had considerable impacts on inheritance tax bills, often pushing modest houses in areas such as London and the South-East above the £325,000 individual threshold. In spite of this, over one in five (22%) believe their home is not liable for the tax and their families could be in for an unpleasant surprise.
Passing on assets before death may seem like an obvious solution to cutting down an IHT bill, however many people are unsure of the tax implications of doing so.
16% believe no taxes apply to passing on assets while you are alive, while 14% readily admit that they do not know what any of the tax implications for passing on assets before death are, demonstrating a notable lack of understanding towards IHT planning.
However, a high number of people were aware that living for seven years after giving away an asset means it becomes exempt from IHT, with 69% of respondents aware of this rule.
Sean Christian, managing director of Canada Life International Limited (CLI), said: “Apathy and a lack of understanding surrounding inheritance tax has created a ticking tax time bomb for many families to cope with in the coming years. It is very worrying that so many people over the age of 45 do not even know what the threshold for inheritance tax is.
“Failure to plan and gain greater understanding of inheritance tax risks leaving your loved ones with exorbitant bills to pay.
“As house prices continue to rise, the £325,000 threshold for individuals will now be applied to many more unsuspecting people who have seen their property’s value rocket in recent years. Inheritance tax hits the mass affluent but many people who are moderately well-off do not seek the kind of financial advice that will lead to lower IHT bills for their family.
“We at Canada Life work closely with advisers to ensure that our range of products meets their clients’ needs. We receive a lot of feedback from advisers about IHT being a frequent blind spot in their clients’ financial planning.
“There are a range of products and solutions to help ease the inheritance bill and ensure as much as possible is passed on. Charitable giving and trusts are simple solutions which can give you peace of mind when organising your estate.”