One third of Britons 55 and older don’t have a plan for their wealth after death, even though they want to. 

Research conducted by Fidelity International also found that half of Britons were either unclear about, or had never heard of, the inheritance tax ‘seven-year rule’ – even though it could potentially make their beneficiaries exempt from the levy.

If the gift is made to a person for more than seven years, it will be exempt from inheritance taxes (IHT). 

A fifth of those intending to leave an inheritance are concerned about not understanding the amount of inheritance tax they might have to pay, or how to manage it efficiently

One fifth of people who intend to leave an inheritance worry about the inheritance tax that they will have to pay and how to handle it.

If the estate is greater than the IHT threshold, this concept should be a key part of any plan to transfer wealth to the next generation.

According to Fidelity, two thirds of people over 55 intend to pass on an inheritance to their family and friends. 

A fifth of people who intend to leave an inheritance did not know how to properly manage the tax. 

This is Money will explain how inheritance tax works and what individuals need to know to make the best decision about how they want to transfer their assets.

How much inheritance tax is charged? 

An inheritance tax is an income tax that applies to the deceased’s estate, which includes their assets and wealth. 

The usual charge for anything beyond the nil rate band allowance is 40 percent.

The standard nil-rate band is £325,000 per individual. You can increase your allowance in a number of ways. 

First, any unused element of a deceased person’s IHT allowance can be passed on to a spouse or civil partner – potentially taking their limit all the way up to £650,000. 

Second, if a married couple or a couple in a civil partnership give away their main family home to their direct descendants, their limit is increased to a total of £500,000 each, or £1million combined. This is called’main residence relief. 

Confusion: According to Fidelity, almost a fifth of those intending to leave an inheritance were concerned they did not understand the amount of tax they might have to pay

Fidelity: Almost a fifth (55%) of the people planning to inherit an inheritance are confused about how much tax they will have to pay.

However, if the total value of an estate is worth £2million or more, the additional main residence relief will be tapered at £1 for every £2 over the £2million threshold.

 This means some higher-value estates eventually lose the benefit altogether.

What is the average inheritance value?  

The average inheritance received in the UK is currently worth £70,639. 

Even if someone was leaving that amount to all of their four children, it would still be well below the £325,000 limit for IHT. 

But while the tax is only paid by a small amount of estates right now, the amount taken in by the taxman has nearly doubled in a decade, from £2.9 billion in 2011/12 to £5.33 billion in 2020/21.

As rising property prices have pushed more houses over the limit, more families are being caught up in the inheritance tax net. 

With Rishi Sunak, the Chancellor, freezing inheritance tax thresholds at the current rates up to 2026 it means that a greater number of taxpayers will have to pay the tax.

According to some analysts, one-tenth of all estates might end up paying 40% tax on any wealth that they inherit.

How does the 7-year rule work?  

Most gifts exceeding an individual’s annual allowance for gifting are subject to the seven year rule.  

This is usually £3,000, although if unused it can roll over once, giving them a £6,000 limit. 

Between gift and death, it can be years Paid tax
Below 3 40%
3 to 4  32% 
4 to 5  24% 
5 to 6  16% 
6- 7  8% 
7 or More  0% 

Gifts exceeding these allowances can be referred to as “potentially exempt transfers” for IHT purposes. 

If they are within the person’s £325,000 allowance when they die, nothing needs to be done. 

However, if the allowance is exceeded by the recipient before their death, inheritance taxes will not be applicable to the gift.

The inheritance tax due for someone who dies within three to seven years of giving a gift is reduced on a sliding-scale basis.

If someone survives for more than three years, their tax burden drops to 40-32%. It falls to 24% to 25% if the person dies.

Dawn Mealing is the head of Fidelity’s advice policy and international development. She stated: “Our research shows a real problem with inheritance planning, in that many people are confused as to how to start.

Fidelity's research also found that only 12 per cent of those aged 55 and over had discussed inheritance planning with a financial adviser, and only three fifths had created a will

Fidelity’s research also found that only 12 per cent of those aged 55 and over had discussed inheritance planning with a financial adviser, and only three fifths had created a will

According to a survey, consumers felt confused by the regulations. This is why it is concerning that one third of people approaching retirement don’t have any plans in place for passing their wealth on.

“Ultimately this may mean they are able to do less for their family than they wish.    

Does every inheritance have to be reported?  

Fidelity research found that many Britons worry about inheritances and need to declare them to HMRC. 

It is estimated that approximately 275,000 deaths per year, or 570,000 on average, have resulted in an inheritance tax form being required to be filed with HMRC reporting the estate’s value, even though there was no tax liability.

It was because less than 25K bereaved family members are liable to inheritance tax each year. This is 5% of all deaths according to the Office of Tax Simplification.

However, new rules have been introduced beginning in January 2022. The forms will not be required for nine of ten estates exempt from inheritance tax.

Fidelity discovered that 85 percent of 55-year-olds were not aware of the changes. 

Fiscal year   Government inheritance tax receipts (£billion)
2011/12  £2.90billion 
2012/13  £3.11billion 
2013/14  £3.40billion 
2014/15  £3.80billion 
2015/16  £4.65billion 
2016/17  £4.82billion 
2017/18  £5.21billion 
2018/19  £5.36billion 
2019/20  £5.12billion 
2020/21  £5.33billion 
Source: HMRC/NFU Mutual  

What can you do to pay less?

If you are concerned about inheritance tax, it may be a good idea to gift your family members gifts while you live rather than leaving all of your estate in your will.

Not only does it have tax benefits, it also means you get to see them enjoy their gifts while you’re still around.

You get a gift allowance of £3,000 each year that falls out of your estate immediately for inheritance tax purposes.

You can also make small gifts of up to £250, specific gifts for family weddings and unlimited regular gifts from income. 

For those looking to minimize or eliminate a significant inheritance tax bill, our team has previously put together a comprehensive list.

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