"While many will have financial plans in place when it comes to their inheritance and passing on assets to loved ones, it’s critical that people take stock of the nuances and traps when it comes to wealth transfer"
- Harry Bell - Charles Stanley
Wealth manager Charles Stanley has found that of the 96% of respondents who plan to leave an inheritance to their children, 46% plan to leave their children a house as part of their inheritance. 30% plan to leave other significant assets to their children and 19% plan to leave a business.
The survey also found that, for High Net Worth individuals, liquid assets remain the preferred form of wealth transfer, with 76% planning to leave inheritance to their children in the form of money. In addition to this, parents with children aged 30-39, have already gifted them an average of £50,973.
However, property is becoming more central to wealth transfer plans, with the over 50s holding 78% of all of the UK's privately held housing wealth.
With the inheritance tax threshold being left unchanged until 2028, more families are becoming liable to IHT as house prices continue to rise.
While ONS figures show that the average house price in the UK in January was £288,000, the figure rises to £508,000 for London - well above the £500,000 individual inheritance tax threshold (including the residence nil rate band). The Office for Budget Responsibility forecasts that the share of deaths resulting in the payment of inheritance tax will rise to 6.3% by 2028–29, the highest level since the 1970s.
Children are not the sole beneficiaries of inheritances - 85% of respondents plan to leave an inheritance to their grandchildren. Of this, 78% plan to leave money, 14% a house, 11% other significant assets, and 9% a business. Leaving money to grandchildren cuts out a round of IHT and so stops an estate’s value being diminished as capital is passed across generations.
The research demonstrates that leaving an inheritance is seen as a milestone achievement by many HNWs. Three in ten (29%) say that their inheritance will be their legacy and 32% say that leaving one is a big part of their financial plan. 13% say they will downsize in order to leave more of an inheritance and 15% plan to leave an early inheritance so that they can mitigate the tax bill.
Harry Bell, Director of Financial Planning at Charles Stanley, comments: “Inheritance tax planning is increasingly important for HNWs as they look to leave their families in a comfortable financial position and make their hard-earned wealth count.
"With the home having become such an integral part of the modern financial portfolio as well as one of the first associations we make when we think of our family, it’s no wonder people are passing these on to their children and grandchildren in such high numbers.
“While many will have financial plans in place when it comes to their inheritance and passing on assets to loved ones, it’s critical that people take stock of the nuances and traps when it comes to wealth transfer.
"A stat from our research which ought to ring alarm bells is that 40% of those with children have not, or do not have financial conversations with them - opening up the chance for family disputes or other financial consequences when it comes to inheritance.
"It’s critical that homeowners seek the correct source of advice when it comes to setting up an appropriate financial plan which works for them and their families.”
What to do if you plan to pass on property to loved ones?
1: Consider passing the property in the form of a gift
The gift will be exempt from IHT if you survive seven years from the date of the gift.
For a gift to be treated as a genuine gift, you must leave your home forever (as if you had sold it) or pay market rent (in which case your child will have to pay income tax on the rent they receive).
2: Watch out for Capital Gains Tax
If you give away your main home to your children, there should be no capital gains tax to pay. However, if you give away a second home or rental property, then capital gains tax will be payable on any profit arising at the time of the gift. HMRC will look at the market value of the property when the gift is made. If this is higher than when you bought the property, you will pay CGT on the uplift at 18% or 24%, depending on your income for that tax year.
If you have not already used your annual CGT exemption, the first £3,000 of gain is tax-free.
3: Make use of the residence nil rate band for IHT
The residence nil rate band is available if a person owned their own property and their will or the intestacy rules (which apply when there is no will) leaves their property to certain relatives defined as 'lineal descendants'.
If a husband or wife leaves their estate to the survivor, the estate qualifies for 100% spouse exemption. Their unused RNRB allowance is preserved and can be transferred to the surviving spouse when they die. This equates to a possible £350,000 IHT-free allowance on the second estate (depending on the value of the property and of the estate at the date of the second death).
This provides for a potential £140,000 IHT saving for children or grandchildren. It is worth noting that the RNRB will taper once an estate is over £2 million.
4: Keep abreast of policy changes
Although the Labour Party is holding its cards close to its chest on inheritance tax, it has strongly signalled that, were they to come into power following the general election, it would repeal any changes to the tax that the Conservatives may have made in the months before. They have also said that they would pursue changes to laws which allow IHT loopholes for non-domicile taxpayers.
5: Consider skipping a generation
Under tax law grandchildren count as direct descendants, and therefore the residence nil-rate-band can be applied when leaving them property. It might make more sense to leave property to grandchildren, who would have more time to use and enjoy the property, and the estate's value would not be diminished by a further round of potential IHT.
6: Consider life assurance to help cover the bill
Any IHT bill will be due within 6 months of death, and many estates struggle to cover it as probate often takes well in excess of this. To avoid your beneficiaries having to borrow to fund the bill, you can take out a life assurance policy that covers the cost immediately.
It is important to note that a life assurance policy can be considered part of your estate for inheritance tax purposes. To avoid this, it is important to speak with your financial adviser about writing it into an appropriate trust.
