Not only were 61% of respondents unaware that the IHT limit is £325,000 ($395,977, €360,834), a further 40% didn’t know that IHT is charged at 40%.
Of that 40%, just 2% thought the rate was higher than 40% meaning that the vast majority could be underestimating their estate’s potential tax bill.
IHT knowledge gap
The Annual Canada Life IHT survey also found that, of those who expect to leave an inheritance, the average amount they expect to leave is £862,856.
This would leave £537,856 above the IHT threshold (called the nil-rate tax band), which when taxed at 40% would leave their estate with a bill of £215,142.
The lack of knowledge also extended to the assets people thought may be liable for inheritance tax, with a high proportion of respondents mistakenly thinking some assets are not subject to inheritance tax.
Almost a quarter of respondents did not know that their main home is liable for the tax (24%). Isas, often marketed as a tax free savings and investment option, are in fact liable for inheritance tax, but 42% thought they were not.
Additionally, 28% were unaware that cash savings and investments were also liable.
Housing accounts for biggest IHT liabilities
The majority of those with a potential inheritance tax bill have this accounted for by the value of their property alone, as almost two thirds (65%) have a property worth more than £325,000.
A quarter had property wealth of over £500,000, putting them well above the nil rate band even before other assets are taken into consideration.
Tools to reduce the IHT bill
A large majority (78%) thought that wealth should be passed from one generation to the next without any tax being due, yet the fact is that many don’t understand the completely legitimate ways they can reduce their family’s inheritance tax bill.
Karen Stacey, head of technical services at Canada Life, said: “This survey focused on people with enough assets to potentially trigger an inheritance tax bill who are middle aged or older. It is deeply concerning to see so little understanding about inheritance tax among this group, especially for a subject about which people care so passionately.
“Ever-galloping house prices over the last few decades is one of the main drivers of why more people are falling foul of inheritance tax, but when coupled with other assets estate planning becomes very complicated.
“To prepare, you need to know you face a potential issue and planning ahead with professional advice can help people to legitimately avoid leaving their loved ones with crippling bills to pay. IHT is not the preserve of only the very wealthy.
“There are a number of legitimate ways to reduce inheritance tax but to use them, people need to know about them as well as have a deeper understanding about the thresholds, rates and exemptions. This is where seeking financial advice early on can be hugely beneficial,” Stacey said.
