Young people waiting (im)patiently to inherit their parents’ and grandparents’ wealth could be in for a shock.
Inheritance tax (IHT) rules allow people to make an annual gift of £3,000 ($3,710, €3,364) per person per financial year, but 84% of adults in the UK are not aware of this limitation, research by Zurich has found.
Only 6% have taken advantage of the tax gift allowance and 15% said they were planning to use it in the future.
Among those aged 55+, over a third (36%) admitted they did not know how much they are allowed to pass on.
Death and taxes
Under UK rules, married couples and civil partners can pass their estate to their spouse tax free.
Their children, however, would have to pay full IHT, which would be 40% on the value of the estate above £325,000.
For those planning ahead and opting to gift money above the £3,000 allowance – there is a requirement that the benefactor survive at least seven years after the gift is given, otherwise tax is payable.
Confusion left and right
In addition, the Swiss insurer found that people wrongly believe there are events or occasions when passing down large sums of money is allowed without paying tax.
For instance, 29% of respondents said they can gift large sums of money to people on their birthday, 20% think they can give it to cover for care costs tax free and 40% are not aware of any occasion where they would be allowed to transfer large lump sums.
But there are people that plan on not gifting money at all.
Over one-in-three (34%) Brits aged 55+ who have children don’t plan on making such gifts in the future, and 37% of the same cohort have not considered passing on large sums of money.
Wrong calculations
The older age group, however, is not the only one making wrong assumptions about inheritance.
Zurich found that adults in the UK believe they will inherit around £218,000 more than what they actually stand to get.
Those aged 25-34 have the highest expectations of any other age group, as they think they will inherit £358,020.
Most people (84%) believe they will receive most of their wealth from their parents, while 14% think their grandparents will step in to gift them money.
Don’t be blindsided
Alistair Wilson, head of retail platform strategy at Zurich, said: “Everyone wants to leave as much of their wealth as possible to their loved ones, but could be losing thousands by falling into the many traps.
“The rules are particularly complex, leaving people baffled as to what they can pass on, how, and when.
“The rules do need to be simplified, but better communication of the options available is also crucial to ensure future generations aren’t cut short.
“Speaking to a financial adviser can help identify the best financial strategy that won’t lead to the tax man at every turn.”
Zurich’s report was conducted by polling organisation YouGov with a representative sample of 2,012 respondents aged 18+.
