Half of over 45s in the UK, who are liable, are unaware that their main property may be subject to inheritance tax (IHT), up from 36% a year ago.
Canada Life surveyed 1,002 UK citizens, holding assets exceeding £325,000 ($419,000, €370,000), as part of its annual IHT Monitor.
It also found over 62% do not think that their pension savings are subject to IHT, compared to 57% a year ago.
Two-thirds are not aware that agricultural land is subject to IHT, an increase from 57% last year.
“IHT ignorance is rising at an alarming rate in the UK, and there is no indication that this will stop any time soon,” said Neil Jones, senior technical manager at Canada Life. “The lack of knowledge about the tax threshold on which assets are subject to inheritance tax has the potential to destabilise estate planning and disrupt plans for people to pass their wealth onto future generations.”
While acknowledging that it is a big issue, Rachael Griffin, tax and financial planning expert at Quilter, took a slightly softer line.
She told International Adviser: “IHT is an incredibly complicated area and, in its current format, it is understandable and forgivable that people are unaware of the IHT implications of their property.”
Government help
Canada Life’s research comes three months after the Office for Tax Simplification (OTS) published recommendations to simplify IHT.
The main finding is the need for IHT to go digital, which could benefit financial advisers and their clients.
Jones added: “Inheritance tax rules have been too complicated, for too long. While the government’s pledge to simplify the administration of IHT is a step in the right direction, more needs to be done to simplify the rules and educate the general population about their nuances.
“Individuals concerned about how inheritance tax rules may affect their current plans should take the time to consult with a financial adviser. They can provide clarity and cut through the confusion to ensure that people are able to pass on as much as possible to future generations.”
Aiden Grant, an associate in the private client team at law firm Collyer Bristow, said to IA: “The £325,000 ‘nil rate band’ under which individuals do not pay inheritance tax has not increased since April 2009.
“During that same period, UK property prices have increased significantly, particularly in the southeast and London.
“It is small wonder that confusion reigns about inheritance tax when people do not even realise they are exposed to it. One can only hope that the OTS’s recommendations for inheritance tax to go digital is the first step towards increasing awareness.”
Education beyond assets
Aside from simplifying the process of filling in forms, there is still plenty of work to do to educate the wider population about the main rules of inheritance tax.
The majority (71%) of over-45s liable for IHT remain unaware of the threshold at which they are taxed – set at £325,000. This proportion remains unchanged year-on-year.
Confusion also persists around the nil rate band and the rate at which assets above the threshold are taxed (40%). The percentage of people who do not know what this rate is has remained the same at around 55%.
Also, just 9% of over-45s are aware of the rate that applies when at least 10% of a person’s estate is left to charity – currently set at 36%.
Fewer than three in 10 (28%) know the annual exemption rate to which they are entitled to (up to £3,000), down from a third (32%) last year.
“Clearly, people do not understand inheritance tax well enough,” Griffin told IA. “The current system is too complicated and instead the government might do best to scrap the residents nil-rate band (RNRB) altogether and instead just raise the nil-rate band (NRB) to £1m; thus simplifying the process and giving people a better chance of being able to plan for their estates finances.
“There is a huge opportunity to simplify the taxation of IHT overall as part of the Office of Tax Simplification’s review of IHT, which is due to publish its recommendations shortly.”
