Yes, Prime Minister: Why everyone should be talking about estate planning

Estate planning is back in the headlines, with David Cameron’s financial affairs following the death of his father coming under heavy scrutiny. But perhaps the bigger issue at the moment is just how few people understand the rules relating to inheritance tax, or are aware of ways to eliminate or reduce an inheritance tax liability.

In a recent survey:

  • Just 14% of the people surveyed were aware that the current inheritance tax-free allowance for individuals stands at £325,000. If the estate is worth more than this, the remainder will be taxed at 40%.
  • Of the homeowners surveyed, a shocking 78% either haven’t considered estate planning or don’t think they’ll be affected by the inheritance tax rules.
  • Only 8% of those surveyed knew that Individual Savings Account (ISA) savings can form part of a person’s taxable estate and would therefore also be subject to inheritance tax.

This lack of awareness is leading to increased revenue for HM Revenue & Customs. It recently announced a record take of inheritance tax for the last tax year, with £4.6 billion due from the estates of thousands of people who have passed away. And inheritance tax receipts are forecast to keep rising, reaching £5.6 billion by 2021. This rise is expected despite the recent introduction of the main residence allowance of £175,000 per person, which applies to estates that include a family home and is due to be phased in over the next few years.

Moreover, the majority of families caught in the inheritance tax trap aren’t anywhere near as wealthy as the Cameron’s. Not everyone stands to benefit from the new main residence allowance, and even those who should benefit are likely to find their home values rising at a faster rate than the supplemental allowance permits.

Our research suggests that rather than being a nation of inheritance tax avoiders, most of us are sleepwalking into inheritance tax liabilities, leaving loved ones with a large and unnecessary tax bill to pay. For most people, the world of inheritance and estate planning is a complicated one, and many believe it doesn’t even apply to them. This is likely to be a costly mistake for many families. All the more reason why a bit of forward planning should be actively encouraged.

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