While looking forward to receiving an inheritance, most clients of UK financial advisers are unaware of the tax liability that would come with it, according to a new survey.
The Prudential UK survey found that only 7% of UK clients seeking financial advice believe they have any potential inheritance tax liability.
Reacting to the findings, senior technical manager at Canada Life Neil Jones said: “Beneficiaries are often in the dark”.
“We’ve seen this consistently – failure to plan has unintended consequences, not just immediately but for generations to come,” Jones told International Adviser.
“Beneficiaries are often in the dark about how much they’ll receive, but nonetheless bank upon an inheritance when it comes to planning their own lives and retirement.
New approach needed
“Our society desperately needs to adopt a more ‘generational’ approach when it comes to inheritance that doesn’t look at death as a starting point. Estate planning should be an ongoing process that ensures inheritances stay with the family now and for years to come,” he said.
Prudential UK surveyed over 900 financial advisers and found the vast majority of clients and their family members are unaware of IHT liabilities, many thinking that the family home is exempt from IHT following the introduction of the IHT Residence Nil Rate Band (RNRB).
The RNRB was introduced in April 2017 and is being phased in over four years having started at £100,000 ($131,000, €116,000) and increasing by £25,000 each tax year until 2020 when it will hit a ceiling of £175,000.
This is in addition to the current overall nil rate IHT threshold of £325,000 (for tax year 2018/19) which covers a main residence passed down to direct descendants.
Not planning ahead
Rachael Griffin, tax and financial planning expert at Quilter, told IA: “This is further evidence that people haven’t looked far beyond the headlines and consider the RNRB to be a £1m nil rate band that means no more inheritance tax on family homes.
“In reality, the RNRB is a prime example of an over-complicated tax policy which is not reflective of modern life as it that depends on a number of factors, including your marital status and who inherits the family home.
“An easier method to achieve the same goal would be to simply raise the standard nil rate band amount to £1m per couple. This is something that should be addressed as part of the government’s current review of inheritance tax.
“In the meantime, it is a clear area for added-value advice to ensure that people understand their position and consider early enough whether they might need to consider using lifetime gifting to minimise their IHT exposure.”
RNRB issues
The survey also found over two-thirds of financial advisers believe the introduction of the RNRB will lead to either a 20% reduction in IHT receipts for HMRC or will remain at current levels.
The UK government forecasts a 33% rise in receipts over the next few years primarily driven by increasing wealth.
Elsewhere, the survey results revealed that 86% of advisers are concerned that clients are delaying traditional IHT planning through investing in shares qualifying for Business Property Relief (BPR) instead of lifetime gifting through a trust in the belief that IHT planning can be left to later in life.
The benefit of setting up trusts to protect assets from IHT was also polled with 53% of advisers believing that this was a primary driver for individuals.
Hilesh Chavda, associate in the private wealth team at lawyers Royds Withy King, said to IA: “The IHT RNRB is cumbersome and complicated.
“The RNRB is not ring fenced. It can be eaten away by other gifts made during a lifetime and other assets that pass on death.
“The Office of Tax Simplification, in its first report published at the end of last year, has said that the RNRB is cumbersome and not much help. I would agree and it needs reform.”
Sarah Wintle, tax, trusts and estates solicitor at Irwin Mitchell Private Wealth, also told IA: “Because of the RNRB many believe their home is now exempt from IHT.
“However, it does not apply if you gift your property to anyone other than your children or grandchildren. Transferring the property under your wills to the children or grandchildren subject to a trust may also not qualify for the relief.
“The strict requirements mean that it is easy for a family to believe that they qualify for the additional relief but due to how their wills are drafted, they may not automatically qualify for the relief. It’s therefore vital to take advice from a professional on this matter.
“IHT planning is best started earlier in life where there are a greater number of options available for the client to mitigate their IHT liability.
“Ideally a more streamlined approach with a mixture of reliefs available will ensure that IHT is mitigated as and when possible, via a variety of mechanisms to reduce risk and increase peace of mind, should be taken by families.”
