Canada Life IHT Survey 2016 – Ignorance of inheritance tax rules may result in a crippling tax bill for families

  • Survey reveals three-fifths of people with potential inheritance tax bill unaware their estate may be liable for IHT
  • Over half don’t know that IHT rate is charged at 40 per cent
  • Record HMRC tax receipts show that families are losing out due to lack of knowledge
  • 78 per cent believe wealth should stay in the hands of their family without being subject to inheritance tax

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The Annual Canada Life IHT Survey* 2016 reveals that more than three in five (61 per cent) UK adults aged over 45 with assets above the individual inheritance tax (IHT) threshold do not know that the threshold is £325,000, putting their families at risk of an unexpected tax bill.

Government tax receipts from IHT have risen rapidly in recent years, climbing 22 per cent in the past 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 might be liable for IHT, with a high proportion of respondents mistakenly thinking some assets were not subject to IHT.

Perhaps most alarmingly, almost a quarter (24 per cent) of respondents did not know that their main home was liable for the tax. Isas, often marketed as a tax-free savings and investment option, are in fact liable for IHT, but 42 per cent thought they were not. Twenty-eight per cent were unaware that cash savings and investments were also liable.

Housing accounts for biggest IHT liabilities

The majority of those with a potential IHT 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) have property wealth of over £500,000, putting them well above the nil-rate band even before other assets are taken into consideration.

IHT 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 IHT 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 IHT bill who are middle-aged or older. It is deeply concerning to see so little understanding about IHT 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 IHT 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.”

 * Survey of 1,001 UK consumers aged 45 or over with total assets exceeding the individual IHT threshold (nil-rate band) of £325,000. Carried out in September 2016. Percentages may not add up to 100 due to rounding or multiple-answer questions. Research conducted by Atomik.

** HMRC IHT statistics published in July 2016.