INHERITANCE tax (IHT) planning reforms have been urged as it emerged many people in the UK are receiving inheritances very late in life. As such, younger generations, such as millenials, are missing out on much needed help. With this in mind, Key, the equity release and retirement experts, argued there is a strong case for “pre-inheritance” to be pushed.
Inheritance tax: Financial advisor provides advice
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Inheritance tax is usually levied on the estate of someone who has died and is passing on their assets. Where IHT is due, it is levied at 40 percent on the parts of an estate valued over a £325,000 threshold. New research on inheritances has shown millions receive funds well into their later years, which does not bode well for younger generations who are relying on family wealth to fund them through life.
Key recently conducted a survey of a nationally representative sample of 2,000 UK adults and combined this with data from the ONS and the Government.
Its analysis found more than 11.6 million people in the UK have received an inheritance in the past 10 years with the average age at which people receive this windfall sitting at 47 years old.
More than one in five (22 percent) adults received money as an inheritance rising to nearly one in three (29 percent) among those aged between 65 and 74, the nationwide study found.
Key noted while an inheritance is no doubt helpful at any age, when contrasted with the average age of inheritance (47 years) with the average first time buyer age (33 years), it is “not hard to see why the idea of ‘pre-inheritance’ has gained prominence.”
Parents – who have potentially benefited from buoyant house prices – are most likely to leave the biggest inheritance with an average of £65,600 while grandparents on average leave £24,200, the research found. Around 11 percent of people – around six million – have received an inheritance from their parents while four percent – the equivalent of 2.3 million people – have had cash from grandparents.
The money is being spent wisely with around 34 percent – around 3.9 million people – investing or saving some or all of the cash. But the property and mortgage market also benefits – around 1.1 million have used the money to buy their first home and 1.7 million have paid off their mortgage thanks to an inheritance. Nearly one in 10 (9 percent) have even put some or all of the cash in their pension.
Younger generations are reliant on inheritances (Image: GETTY)
Key examined where these inheritance are predominately coming from, with more than half (51 percent) of those who have received inheritances being left money by their parents while a fifth (19 percent) received cash from grandparents. Around 16 percent were left money by uncles or aunts and 13 percent received cash from family friends.
Cousins were also the source of inheritance for 11 percent of those who have received windfalls in the past 10 years with siblings leaving money in nearly one in 10 (nine percent) of cases.
While inheritances can pay a crucial element in financial and estate planning, they are becoming a critical target for the Government.
Recent data from HMRC showed IHT receipts hit £5.4 billion in the 20/21 tax year and between April and July £2.1billion was collected, £500million higher than the same period a year earlier.
It should be noted IHT receipts have, according to key, stayed “broadly flat for the past four years thanks in part to the introduction of the Residential Nil Rate Band which allows spouses or civil partners to transfer allowances rising to £175,000 in the 20/21 tax year.”
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Will Hale, the CEO at Key, commented: “Intergenerational wealth transfer is a major issue for society as a whole and for the financial services industry and the scale of inheritance shows why that is the case.
“More than 11.6 million people have benefited from inheritance pay-outs in the past 10 years and the average amounts received can be substantial and potentially life-changing – especially if residential property is involved.
“The idea of inheritance arguably works best when the person receives the support at a time in their life when it can do the most good for their long-term financial security. However, with the average age of inheritance sitting at 47 years old – when people are more likely to have built up assets – we are seeing more conversations happening about providing people with a ‘pre-inheritance’.
“Not only do people benefit from the support when they need it but their older relative is able to enjoy seeing the difference that it has made to their lives. However, getting good financial advice is important to ensure than not only do they not fall foul of inheritance tax regulations but there are sufficient assets to cover potential care costs in older age.”
Property often makes up the largest part of an estate (Image: EXPRESS)
Mr Hale went on to issue guidance, provided exclusively to Express.co.uk, on how families could manage their IHT costs: “The average age at which people are receiving inheritance at 47 makes the case for pre-inheritance as by that age most people will have bought a house and built up their finances. They would have benefited more potentially if the money was given earlier as long as people giving money can afford to do it.
“Everyone has an annual £3,000 exemption for gifts that can be given tax-free and any gifts given seven years before death do not count towards your estate and won’t attract Inheritance Tax so there is an incentive for people to give money away if they can afford to. Doing so reduces any potential IHT liability and will help family members’ finances at a time when it will be more useful.
“We see customers using equity release plans to access their property wealth so they can continue to live in their home and give money to families. In the first half of the year nearly a quarter of all money released was given to family as gifts and the average value of the gifts was £72,520.”
Guidance of this nature should be heeded as younger generations will be looking to their parents and grandparents for help over the coming years.
In late August, Fidelity International conducted research on a nationally representative sample of 2,000 UK adults.
The results of this study, which was focused on inheritance planning, found that younger generations are counting on the transition of wealth between generations to fund their financial goals.
Two-fifths (43 percent) of people expect to receive an inheritance or lifetime gift of wealth from family and friends at some point, with millennials and Generation Z – or those under the age of 45 – the most expectant generations (65 percent). Younger generations plan to use these inheritances to cover mortgage costs, getting on the property ladder or covering various debts.
Dawn Mealing, the Head of Advice Policy and Development at Fidelity International, commented: “Buying a home and saving for retirement are considered two of the most significant milestones upon the road to financial security.
“However, our research highlights just how many of the UK’s younger generations are counting upon the passing down of wealth from family and friends to achieve them.
“Families are increasingly looking at how they tackle these goals together, considering how and when this transition of wealth takes place – either as an inheritance, or sooner as a lifetime gift – so it can be used most effectively.
“With expectations high, it’s important that families and friends discuss their intentions so there is a clear understanding of the wealth that will be passed on and when.”