The increase of multi-generational estates could lead to a rise in inheritance tax bills across the UK.
As life expectancy has increased over recent years and has only just started to stall, estates are becoming increasingly complex, with multiple generations being alive at the same time.
As a result, assets are being left to multiple generations, resulting in families having to deal with multiple bills for inheritance tax (IHT).
Passing on assets within the family is natural for the majority of parents, with many also looking to provide grandchildren and ever great-grandchildren with a financial sum.
However, recent research has revealed that as the oldest generation starts to die, it could result in a significant amount of wealth cascading through the generations. According to Royal London, this could total over £400 billion.
In turn, it’s likely that much of this inherited wealth will be subject to IHT, which could significantly reduce the amount of wealth that the deceased had intended to pass on.
One factor which is likely to increase the likelihood of an IHT crisis is the lack of education around reducing it. Whilst there are a number of tools available to minimise the IHT burden, without the required awareness, it’s unlikely that people will choose to take advantage of them.
One example of this is the new residence nil-rate band which applies where the prime residence is being passed to direct descendants. At a starting exemption of 125,000 on top of the existing inheritance tax threshold, the RNRB will grow to £175,000 by 2020, meaning couples will have a joint allowance of up to £1 million.
Whilst this could significantly reduce, or even eliminate the need for some families to pay the tax, the lack of awareness around the detail of the RNRB could result in people missing out.
Gifts are another way of reducing inheritance tax, with those given at least seven years before death not being subject to the tax. For those of ill-health who feel that they will not survive long enough for the exemption to apply, there are numerous other gifting options. Gifts of £250 can be given to any number of separate individuals, whilst the larger sum of £3,000 can be gifted each year if just to one person.
Pension funds will also be free of inheritance tax if the individual is under 75 upon death. However, even if they are over this age, those due to inherit can still benefit as the existing fund can go towards their own pension.
Whilst these tools are key in helping families mitigate the burden of inheritance tax, they are of little use if people are unaware of them.
Financial organisations are being called upon to increase education around wealth planning for later life, and not just to those who are of the older generation. Ensuring that younger age groups are given appropriate financial education could have a significant impact both now, and in future.
