11 Sep 2019 Making sense of the many complicated inheritance tax rules can be tricky and an added challenge at an already testing emotional time. The Office of Tax Simplification has proposed a radical shake-up, recommending that the seven-year gifting rule should be cut down to five years along with simplification of the link between IHT and capital gains tax. If this is seen through, it could make a huge difference to how people choose to pass down their wealth.
What is more, as younger generations increasingly seek the help of the ‘Bank of Mum and Dad’ and the possibility of inheritance now plays a large role in individual financial plans, there appears an apparent inheritance disconnect between Brits as many assume they will inherit thousands more than the reality. New research from Zurich has found not only people don’t know how much money can be passed on IHT free, but also don’t know exactly how much they are due to inherit.
· 40% of people don’t know how much money can be passed on inheritance tax free
o Even amongst those over the age 55, 36% don’t know how much they can pass on
· Married couples and civil partners can pass their estate to their spouse tax-free when they die. An annual tax gift allowance of £3,000 per person (for the year 2018/19) means money can also be given away to children. For larger sums, the individual must live seven years after making that gift for it to remain tax free.
· However, 84% of people haven’t heard of this £3,000 allowance, just 6% have taken advantage of it and only 15% say they plan to gift in the future.
· Furthermore, 29% of people wrongly believe they can gift large sums of money to people on their birthday, 20% believe they can gift large sums to cover care costs without paying inheritance tax and 40% don’t know of any occasions when they can pass on large lump sums of money.
· 34% of those aged 55+ with children don’t plan on gifting in the future, and 37% of this group haven’t considered it.
Alistair Wilson, Head of Retail Platform Strategy at Zurich, commented: “Everyone wants to leave as much of their wealth as possible to their loved ones, but could be losing thousands by falling into the many traps. The rules are particularly complex, leaving people baffled as to what they can pass on, how, and when. The rules do need to be simplified, but better communication of the options available is also crucial to ensure future generations aren’t cut short. Speaking to a financial adviser can help identify the best financial strategy that won’t lead to the tax man at every turn.”
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