Widespread uncertainty and confusion around Inheritance Tax (IHT) means millions of over 55s are at risk of leaving families with what could be a significant tax bill to be pay from the deceased’s estate. Research from financial planning experts at abrdn found that a third (32%) of UK adults over the age of 55 (16.4 million people1) are unaware of whether or not their families could be left to pay a tax bill when they pass away.

abrdn’s research also found three in ten (29%) over 55s don’t think their wealth is large enough to need advice on inheritance tax. Yet, when asked to value their current wealth, on average individuals estimated they would have a total of £354,000 in assets – which is above the inheritance tax threshold of £325,000 and is double for married couples. In London, the average estimation jumped to £556,999.

This comes as HMRC reports a 24% increase in the number of people paying inheritance tax in the 2022-23 financial year2. In April – May 2023 alone, £1.2 billion was paid to the Exchequer in IHT – an increase of £100m on the same period in the year before3. abrdn’s research – which follows its in-depth studies of the financial behaviour of near and new retirees in its ‘Class of’ series – found common confusion around wealth planning, heightening the risk of millions of families incurring unintentional tax liabilities:

• Nearly eight in ten (78%) don’t understand the residence nil rate band – an additional allowance that can increase the amount up to which an estate has no IHT to pay
• Seven in ten (70%) of the over 55s surveyed admitted they don’t know how to reduce inheritance tax bills for their loved ones
• More than half (51%) of the over 55s surveyed also said didn’t know how to start to value their property, savings and investments to understand how inheritance tax could apply to them.
• The majority (55%) didn’t understand the ‘seven year’ rule and two thirds (66%) don’t know how to gift during life without paying tax
• A fifth (19%) also don’t know where to begin setting up a will and 72% didn’t understand how to set up a trust.

Shona Lowe, Financial Planning Expert at abrdn, said: “Inheritance tax is no longer the ‘wealth tax’ it once was. Thanks to years of soaring property prices across the country, alongside the freeze of the ‘nil-rate’ band until at least 2028, more people are likely to be liable.

“Navigating inheritance tax can be a complicated and daunting but it’s a reality of life for more and more people so it’s something to grasp and talk about with loved ones. Our latest research found people feel more comfortable talking about their health problems and politics, than money. 

To help, Shona Lowe shares her tips for those wanting to help their families reduce their potential bill:

#1 Realise the power in gifting

Giving lifetime gifts is a way to reduce the value of your estate and therefore reduce your potential inheritance tax bill.

Some gifts are exempt, which means the value of them leaves your estate immediately. That could be because they fall under the ‘annual exempt amount’, which allows you to gift up to £3,000 each year split between as many recipients as you like. Or it could be because they fall under the ‘small gift exemption’, which allows you to make as many gifts of up to £250 as you choose in a year, as long as each one goes to a different person. 

You can also give away any extra income you have that you don’t need to fund your current lifestyle, provided it’s a pattern of gifting and again, the value of those regular gifts will leave your estate immediately.

If you give a gift that doesn’t fall within one of those exemptions, you will need to survive for seven years after giving it in order for its value to leave your estate completely.   

It’s important to highlight that gifts don’t just have to be made to other people. They can also be made to charities, in which case they are exempt and the value leaves your estate immediately. They can also be made into a trust.

#2 Consider trusts

If you have concerns about making gifts directly to another person, perhaps because it would be a lot for them to have to manage, or you are worried what could happen if they got divorced or had financial difficulties, you could look at making that gift into a trust instead. This can be complex and is an area where specialist advice is really important. On a basic level, it’s about working out the following points:

·      what you want to gift (which could be money, investments or a property for example),

·      who you would like to have control over it and make decisions about that gift after you’ve made it (your trustees, which can be you),

·      who you would like to be able to benefit from that gift going forward (your beneficiaries, which can’t include you if you’re making the gift for inheritance tax purposes) and,

·      how you would like that to work (your trust deed)

Most gifts into a trust will take seven years to leave your estate completely and if they are over your nil rate band, there may also be inheritance tax to pay when the gift is made. Depending on what you put into the trust, you may also need to consider capital gains tax and other taxes too. Specialist advice is critical here. 

#3 Remember who pays, how and when

If you have a will, the responsibility for working out how much inheritance tax is payable falls to your executors. The tax is then generally paid from the estate before it is passed on to your beneficiaries. However, if the tax is payable because of a gift you made while you were alive, the person who received that gift will generally have to pay that inheritance tax.

If you don’t have a will, it will be payable by the person appointed to administer your estate, again from the estate itself.

If you die with money in your bank account, the Direct Payment Scheme (DPS) can allow a portion or the entire tax to be paid directly from that account. Otherwise, the tax can be paid by selling investments or property for example. 

One thing to be aware of is that in most cases, the inheritance tax bill has to be paid within six months of the date of death, after which interest will be charged.