The cost of living has skyrocketed in the last few months and thus is having a significant impact on the inheritance figures. But most people don’t understand how to work around the issue. Therefore, firms offering tracing and other inheritance-related services need to re-strategise how to advise their clients regarding making plans for their estates.
Sadly, industry experts predict inflation will rise to double digits soon, worsening the already challenging economic times.
Let’s have a closer look at the all-time high costs of living and its ramifications on inheritance.
According to PWC, inflation figures haven’t been this high since the early 80s. From the Opinium survey of 2000 UK adults, 8 in 10 UK adults expressed concerns about their daily living costs.
In a different study, 89% (46 million) of Britons reported a higher cost of living compared to 62% in 2021. Of the figure, 94% said they noticed an increase in food prices, while 82% reported an increase in electricity or gas prices. A further 77% said fuel prices have gone up.
It’s also quite disheartening that 33% of people surveyed wouldn’t have enough money at hand to cover their loved one’s funeral. It was also found that 35% wouldn’t have anyone to assist them with money to cover the costs. 15% would borrow from family members, while 14% would have to apply for a loan.
The tough economic times have influenced many to cut down on non-essentials like eating out or travelling, but this hasn’t been enough to cover essentials. People are taking loans to meet their daily expenses and running into debt. As a result, they are now counting on their inheritance.
People are also weighing between using their money to meet their day-to-day living requirements or setting something aside for inheritance.
This issue has also led to over 50% of people experiencing mental health issues like anxiety. A further 25% feel depressed.
The Impact of The Rising Costs on Inheritance
As we discussed earlier, many beneficiaries now rely on their inheritance money to support themselves and pay their debts.
The first group is those receiving inheritance who, under normal circumstances, would have passed it on to their children. As a result, this will affect the future of their dependants, and most of them shouldn’t expect much. Another outcome would be getting a far lower figure than expected.
The other group belongs to those that would have loved to save towards their loved ones’ inheritance. They won’t be able to do so, as they will instead have to use the money, they had earmarked for this purpose to meet their daily living costs.
The high living cost also raises doubts about whether there will be a reduction in estate value. In the last two years alone, the total value of estates has gone down by 23%. That is from £289,000 to £221,000.
Therefore, anyone counting on their estate as a primary source of income or supplemental income provision is worried.
The Nil-rate Band Effect
Over the last ten years, housing rates have continued to rise. However, the same hasn’t happened for inheritance. The nil-rate band hasn’t increased with inflation. Instead, the nil-rate band for tax-free inheritance has remained at £325K, with the residence nil-rate at £175K. This threshold is frozen until the tax year 2025-26.
In fact, the amount of inheritance that loved ones can inherit without tax keeps shrinking as inflation continues to rise.
What does that mean?
If the nil-rate had risen with inflation annually, it would now be at £478,078 instead of £325,000. This would have attracted a tax-free inheritance of £153,078, that UK citizens would have been able to leave their beneficiaries.
Interestingly, homeowners might be paying inheritance tax if they don’t plan properly. Forecasts from the Office for Budget Responsibility reveal that between 2022 and 2023, inheritance tax will be around £6.7 billion.
Inheritance receipts have been rising higher than expected since 2010. Experts attribute this to clients underestimating their estate value. Those in East England and London will see the highest inheritance tax charges. The rate has risen to 55%.
Can Anything Be Done?
Luckily, there is a lot you can do.
It is crucial for proper planning to work around the inheritance tax issue. Some ways to mitigate the problem are to take advantage of exemptions and allowances.
- Ensure that your client has updated their will. Does it take the new residential nil rate into account? This is tax exempted, and if you have children, it could add around £350,000 to your estate.
- Check if their life policies, pensions, death service benefits, assets (home) and other investments fall under the inheritance tax.
- Deduct any tax-free bands or reliefs to see how much inheritance tax may be payable.
Here are a few things to note:
- If one spouse passes, the remaining spouse doesn’t need to pay asset tax
- It’s only when the second spouse dies that the assets will be taxable if they pass them on to their children
- Gifts to a trust attract inheritance tax
- For individual gifts, inheritance tax is payable should a death happen within the first seven years
- Gifts to political parties or charities are exempt from tax
- Business and agricultural assets/properties can also be 100% exempt, but this is after meeting certain conditions
- Alternative investment market shares for trading companies can be 100% exempt depending on some conditions
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