‘A real issue’ – ‘Confusing’ inheritance tax rules leaving Britons with no concrete plans

Inheritance tax explained by Interactive Investor expert

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Inheritance can be a very complicated area of financial planning, and it appears more and more Britons who want to leave something behind are finding it difficult to put plans in place. This confusion could cause people to be unaware of inheritance tax (IHT) rules and ultimately pay the price.

Over a third of UK adults (34 percent) with inheritance intentions have no concrete plans on how they will pass on wealth to the next generation despite intending to, according to research from Fidelity International.

They also find that while over half (58 percent) of all UK adults intend to pass on an inheritance, just one fifth (20 percent) have considered how much they might need for their retirement income, or to help fund care in later life should they or a loved one need it.

Almost A quarter (24 percent) of those aged 55 and over currently have no plans for their inheritance, despite 65 percent of this age group intending to leave wealth to friends and family members.

More than a fifth (22 percent) of those intending to leave an inheritance, and 17 percent of those aged 55 and over, are particularly concerned about their lack of understanding of the amount of inheritance tax they might have to pay or how to manage this most efficiently.

Nearly half (49 percent) of all those surveyed were also unclear or had never heard of the seven-year rule for inheritance tax, or whether this applies to them.

The seven-year rule means gifts are exempt from tax if the person lives for seven years after giving them.

Furthermore, some 85 percent of those aged 55 or over are unaware that from January 2022, new rules will come into place meaning that nine in ten estates that are not subject to IHT will no longer need to complete the relevant forms.

Only 12 percent of those aged 55 and over have discussed inheritance planning with a financial adviser, and just 27 percent have discussed their plans with their family. Only three fifths (60 percent) of people have created a will.

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Dawn Mealing, Head of Advice Policy and Development at Fidelity International, said: “Our research highlights a real issue with inheritance planning in the fact many people are confused about how to get started.

“Consumers said they felt the rules and regulations are confusing, and it’s concerning to see a third of those approaching retirement having no concrete plans for passing on their wealth.

“Ultimately, this could mean that they have much less to leave their loved ones than they would like. It’s time the fog around inheritance tax was cleared.

“While January should see the Government’s plan to make administration concerning inheritance tax simpler come to fruition, it’s yet to be seen whether this will have a positive impact on people’s everyday knowledge and understanding.”

Ms Mealing also provided some tips and insight for people who are confused about inheritance planning:

Make sure your future is secure first

“Before you make any big inheritance decisions, it’s important to have a clear understanding of exactly how much you’ll need to enjoy your retirement and/or cover things like care which might be required unexpectedly.

“While gifting an inheritance is an ambition for lots of people to support loved ones, your priority should be your own financial safety net.”

To gift or not to gift

“Gifts up to £3,000 per annum can be made free of IHT. Any gift in excess of £3,000 will become a potentially exempt transfer if you do not pass on for seven years after making it. If you do pass on within the seven-year period, the gift will become subject to IHT.

“It is also worth noting there are several annual exemptions for gifts: each tax year you can give away wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child), and £250 per person per year assuming none of the other exemptions have applied to the recipient within that tax year.

“Anything in excess of these limits is considered a Potentially Exempt Transfer (PET), at which point the seven-year rule will apply.”


Ms Mealing also discussed the difference between Capital Gains Tax (CGT) and inheritance tax, in case of any confusion.

She said: “IHT is a tax on the value of a deceased’s estate. Capital Gains Tax (CGT) is a tax on profit. Gifting an asset during your lifetime may mean both taxes interact with expensive consequences.

“Paying CGT now to save IHT later may not make financial sense. If you are planning a large gift, seek advice.”

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