With the increase in housing wealth over the past 20 years, many people are set to inherit a lot of money and be saddled with big inheritance tax bills.
While financial advisers are undoubtedly one of the best-qualified professions to help clients navigate the complexities of trusts, gifts and intergenerational planning, HM Revenue & Customs IHT receipts show some families are simply not seeking advice for their and future generations' costs, according to Prudential's Wealth Unlocked report.
And although the pandemic has stimulated the need for advice, the number of those adopting wealth transfer strategies remain low.
The report revealed some of the main concerns people have when passing on wealth, one being that those passing on the money might need the funds in the future.
Les Cameron, head of technical at Prudential UK, says: "Our report has also shown that many people do not want to do IHT planning because they do not want the next generation to squander their money; they want to keep control of their money; they want access to their money; or they are worried they might cause tax bills for the next generation."
He notes: "I don’t think there is a best way to reduce your IHT bill, as it come down to individuals’ needs and objectives."
So what are the ways these concerns can be addressed to help mitigate those tax bills while allowing those doing the gifting to retain some control or to prevent younger generations from frittering away the money?
Jason Barefoot, an IFA at Ascot Lloyd, says the first thing that needs to be established is whether there is a current or future tax bill on the estate. The total value of the estate’s assets should be collected, and from that deduct off the applicable tax-free bands that apply, which will be individual nil rate bands (£325,000 per person).
The main residence NRB (at £175,000 per person) might also apply, although this is only applicable if the house is passed to direct descendants and it reduces on a sliding scale if the estate is above £2m.
“It is complex,” Barefoot says. “It depends so much on the individual plans, what someone wants to do with their time, how comfortable they feel with their own financial position and the structure of their assets in terms of liquidity – are they asset rich and cash poor?
“Also, do they wish to forego control of any funds set aside for IHT? There are a lot of variables rather than a best approach, though there’s a broad process. If there’s a liability, then it’s about mitigating it while you can.”
Caroline Keegan, chartered financial planner at Balance Wealth, says: “It is always best to start planning sooner rather than later, even if the plan is to take major decisions at a later date.
