Three-fifths of people with potential inheritance tax bill are unaware their estate may be liable for inheritance tax (IHT).
The Annual Canada Life IHT Survey 2016 has revealed that more than three in five (6 per cent) of UK adults aged over 45 with assets above the individual IHT threshold do not know that it is £325,000, putting their families at risk of an unexpected tax bill.
Government tax receipts from inheritance tax have been rising rapidly in recent years, climbing 22 per cent in the last year, to £4.7bn in 2015/16.
Over half of respondents (52 per cent) were not aware that IHT is levied at a rate of 40 per cent. Of those, just 2 per cent thought the rate was higher, meaning the vast majority could be underestimating their estate’s potential tax bill.
Canada Life’s 2016 survey also found that, of those who expect to leave an inheritance, the average amount they expect to leave is £862,856. This would leave almost £540,000 (£537,856) above the IHT threshold (called the nil-rate tax band), which, when taxed at 40 per cent, would leave their estate with a bill of £215,142.
The lack of knowledge also extended to the assets people thought may be liable for IHT, with a high proportion of respondents mistakenly thinking some assets are not subject to IHT.
Perhaps most alarmingly, almost a quarter of respondents did not know that their main home is liable for the tax (24 per cent).
Isas, often marketed as a tax-free savings and investment option, are in fact liable for inheritance tax, but 42 per cent thought they were not. Some 28 per cent of people were unaware that cash savings and investments were also liable.
Housing accounts for biggest IHT liabilities
The majority of those with a potential inheritance tax bill have this accounted for by the value of their property alone, as almost two thirds (65 per cent) have a property worth more than £325,000.
A quarter (25 per cent) had property wealth of over £500,000, putting them well above the nil rate band even before other assets are taken into consideration.
Inheritance tax remains a subject people feel passionate about.
A large majority (78 per cent) thought that wealth should be passed from one generation to the next without any tax being due, yet the fact is that many don’t understand the completely legitimate ways they can reduce their family’s inheritance tax bill.
Commenting on the findings, Karen Stacey, head of technical services at Canada Life said: “This survey focused on people with enough assets to potentially trigger an inheritance tax bill who are middle aged or older.
"It is deeply concerning to see so little understanding about inheritance tax among this group, especially for a subject about which people care so passionately.
"Ever-galloping house prices over the last few decades is one of the main drivers of why more people are falling foul of IHT, but when coupled with other assets estate planning becomes very complicated.
"To prepare, you need to know you face a potential issue and planning ahead with professional advice can help people to legitimately avoid leaving their loved ones with crippling bills to pay. IHT is not the preserve of only the very wealthy.
“There are a number of legitimate ways to reduce inheritance tax but to use them, people need to know about them as well as have a deeper understanding about the thresholds, rates and exemptions. This is where seeking financial advice early on can be hugely beneficial”.
The survey polled 1,001 UK consumers aged 45 or over with total assets exceeding the individual inheritance tax threshold (nil rate band) of £325,000, and was carried out in September 2016.
