Most unaware that the UK inheritance levy will hit their estates hard, warns Jeff Salway
AFFLUENT Scots are at growing risk of sleepwalking into an inheritance tax (IHT) trap because they underestimate their chances of being hit by the charge, new research shows.
A combination of asset-price inflation and a freeze in the IHT threshold means the number of people with estates which would fall in range of the tax is on the rise.
Yet 48 per cent of Scots who are likely to leave their beneficiaries with a hefty IHT bill when they die don’t know the threshold at which the tax kicks in.
The warning comes in a new report by Close Brothers Asset Management, which said many Scots whose estates would be liable to IHT think the threshold is higher than it is.
But 27 per cent of people in Scotland with assets above £325,000 (including their home) have no plans in place to guard against the so-called “death tax”, while 47 per cent – the highest proportion within the UK – believe they don’t need to do anything to prevent their beneficiaries from being hit by the tax.
A third of those north of the Border whose estates are exposed to IHT have never sought advice on it. That is also above the UK average, suggesting a complacency among families in Scotland, said Andy Cumming, Edinburgh-based head of advice at Close Brothers Asset Management
“When it comes to personal finances, those looking to pass on their wealth cannot let inheritance fall under the radar. It can only be ignored for so long,” he said.
“A combination of planning inertia and a general lack of awareness is to blame, but it is crucial that those who will see their estates subject to the tax understand their liability.”
With some £75 billion inherited in the UK every two years, according to the Office for National Statistics, huge sums of family wealth are exposed to the 40 per cent IHT charge.
And the Office for Budget Responsibility expects the number of estates liable to IHT to rise by 60 per cent over the next five years, with the government last year extending a freeze on the threshold until 2019. By that point the level above which estates are taxed at 40 per cent will have remained at £325,000 for a decade.
The extension was part of a UK government plan to help fund reforms of social care in England and Wales, but the measure affects Scottish households too.
The recent resurgence in house prices and investment values is also likely to drag some estates above the threshold.
“The 2007 change allowing a widow or widower to claim their late spouse’s unused nil rate band was a significant improvement, but even with two nil rate bands [currently £650,000] many Scots will be in IHT territory on second death,” said Paul Lothian, director at Verus Financial Planning in Dundee.
“Given that the nil rate band is unlikely to be increased for some time, and will almost certainly lag behind asset price growth, many more may be caught in the IHT net as the value of property and investments increase.”
Mitigating IHT can be simple, said Lothian, yet many fail to do anything or leave it too late. One of the more straightforward measures is to place life insurance in trust, which means the proceeds stay outside the estate.
Taking advantage of the seven-year gift rule is similarly effective. This allows you to gift as much as you like to others IHT-free provided you survive for seven years after making the gift and no longer have an interest in the asset.
Yet eight in ten Scots with assets above the IHT threshold are unaware of this option, the Close Brothers research found.
Almost as many said they didn’t know about business property relief, which can be claimed on the transfer of business assets (such as AIM investments) and therefore help reduce the taxable estate.
You can also gift up to £3,000 a year and make one-off gifts of up to £250 at any time without them being liable to IHT, while donations can be left to charity tax-free.
“Careful use of lifetime gifts, regular gifting out of surplus income, use of the annual exemption and the acquisition of IHT-exempt assets should mean that most can plan away any IHT liability while ensuring their own lifetime financial needs can still be met,” said Lothian.
Credit card providers turning down nearly 2 out of 3 applications
Credit card providers are turning down almost two in every three applications, new research shows, with people in Dumfries the least likely in the UK to secure finance.
The proportion of credit applications rejected has risen from 59 to 61 per cent over the past year, according to the latest credit index from Totallymoney.com.
In Dumfries, the UK capital of card rejections, 64 per cent of applications have been turned down, while Kilmarnock is third in the thumbs-down table with 63.7 per cent rejected.
The index reveals an increasingly stark divide between affluent and lower income areas in terms of the proportion of applications that end up in the bin.
Card providers continue to take a risk-averse approach to credit, forcing under-pressure households to turn in growing numbers to high-cost alternatives such as credit repair cards and payday loans.
Just 52 per cent of applications for credit repair cards are rejected, Totallymoney found, but their more lenient lending rules come at the cost of higher charges.
Will Becker, co-founder of TotallyMoney.com, said rejection levels had increased despite most lenders relaxing their acceptance criteria.
“This can only mean that consumer confidence has started to increase and those with a poor credit history are making applications for credit again,” he said.
“Overall, whatever your postcode, it’s surprising to think that you have less than a 50 per cent chance of being accepted.”