Inheritance is nothing to bank on, but the reality is that every year in the UK well over £10 billion is passed down to the next generation.
If you are reading this and you are in the 35 to 60 age range, then there is a strong likelihood that you are going to inherit wealth in the coming years. And now more than ever before you are going to have to pay tax, sometimes considerable amount, on this lump sum.Though an inheritance may sound like a blessing, the result can sometimes be the exact opposite. Studies have shown that regardless of the circumstances, a large majority of people who come into an inheritance experience “sudden wealth syndrome”, which is characterised by confusion, anger, sadness or a combination of all three.1Almost three times as many estates are expected to face “death duties” this year compared with six years ago. The Office for Budget Responsibility, the government’s fiscal watchdog, has estimated that 40,100 bereaved families will face tax on their inheritance in the current tax year, rising to 45,100 in 2016-17.Industry research suggests around £550 million will be wasted in IHT this year as people fail to prepare properly.Seeking advice after the event is too late – not to mention that it is always a bad idea to be dealing with financial matters at a time when it is impossible to have a level head. Intestacy is a huge problem across the population and the risks to those left behind cannot be overestimated.
Here are the top 5 steps to take now to prepare financially for inheritance.
1. Family Discussion
Discussing forthcoming death is a decidedly un-British conversation for a family to have. But it is foolish not to be having that conversation early on in retirement years so that all stakeholders in the family fortune can be involved in the plan. Tax-efficiency is only reason for this
In one seminal study of 3,250 families which had lost their wealth, less than 3% said poor planning and investments caused their reversal of fortune. Instead, 25% said heirs were unprepared, and 60% identified a lack of communication and trust in the family.2
The consequences of neglecting intellectual legacy can be seen in the families who ignored it, such as in the case of William Henry Vanderbilt’s heirs. Their fortunes could be worth over $300 billion in today’s money. However, by 1973, in just two generations, not a single heir was even a millionaire.
2. Property Decisions
Property is undeniably the largest asset in an inheritance estate in today’s property-obsessed UK society. With London property prices up close to 70% since 2010, property is pushing more and more estates past the inheritance tax threshold and landing growing numbers of inheritors with hefty bills at an already difficult time. It is also a main driver of inheritance “stresses” given the property’s illiquidity and the difficulty of splitting it up. New legislation on the tax burden for investment properties will make life more complicated.
Some questions that the family should decide upon include:
- Should the family home be safe-guarded at all costs?
- Are there issues around splitting the estate which forces an undesired sale of the family home at a potentially disadvantageous time to sell?
- Should current parents “downsize” their primary home in retirement (an increasingly popular UK phenomenon and retirement planning strategy).
3. Consult Professionals
It really pays to be discussing these issues with a professionals who deal with these matters day in day out. In the UK, that typically means meeting with a tax adviser or wealth manager, and in some cases both. A tax adviser will give you a pure accountancy take on securing tax-efficiencies related to inheritance.
A wealth manager could give a more rounded view on not only the tax element but the investment angle of what happens to legacy investments and the future of potentially splitting the estate amongst several inheritors. Often, both wealth manager and tax adviser will work together on advice and implementation.
Either way, a free non-obligation discussion is a key action point to think about sooner rather than later. We can help you find your relevant finance professional simply click here
4. Finish the Project
Start what you finish; so many times we see meetings take place and no follow-through. Either through busy schedules, reluctance to discuss the issues or reluctance to pay fees for something in the future, inertia is your worst enemy.
Fees will be far higher after the event, not to mention in the tax inefficiencies and added stresses you are likely to incur. Being organised well in advance is just the smartest thing to do.
5. Keep your plan up to date
You have to be realistic: families change, and set-ups are now more fluid than ever. Wealth managers are adept at devising financial plans that take account of any number of complexities and you may be surprised to find just how tailored a solution they can develop to serve you and your family’s evolving needs.
Capital preservation is the foundation of a robust family wealth strategy, and it is vital that you take steps to ensure that as much of your hard-earned funds remain within the family as possible. Inheritance tax planning something everyone will want to pursue, but even those with fairly modest wealth are increasingly seeking ways to protect family assets from adverse events like divorce, for example.
You can start the process of finding the right professional to manage your wealth by trying our smart online tool. Or, if you would like to discuss your situation further with our straight-talking team, please do get in touch here.