Rich pickings for Treasury

Q Doesn’t Inheritance Tax only apply to really rich people?

A With allowances set at £1 million for a married couple’s combined estate before any inheritance tax is due, this is a reasonable perception held by many.

You may not feel “rich”, but you may well be rich enough that inheritance tax should be a consideration for your financial planning.

Let’s look at newly retired couple Jane and John’s position.

The couple are both 65 years old and in good health, they enjoy a nice lifestyle with two cars on the drive, a couple of foreign holidays each year, and they like to travel around Scotland bagging Munros.

Jane and John have two grown-up children, who have flown the nest, and continue to live in their four-bed detached family home outside Edinburgh.

Recently made redundant, John had a career as a civil engineer and saved into pensions throughout. Jane worked as a teacher and has a public sector pension. She also has a small pension saved from earlier on in her career. They each have full entitlement to the State Pension.

They also have some savings with their bank – an emergency fund combined with John’s redundancy money.

Their home has a value of around £650,000, John’s pensions come to about £500,000, and Jane’s £20,000. Their savings in the bank come to some £200,000.

Combined, their State Pensions will provide about £24,000 per annum in two years’ time. Jane’s teacher’s pension already pays about £10,000 every year. Jane and John spend roughly £50,000 over 12 months and this is likely to remain steady.

In the next couple of years, Jane and John will draw from their cash savings and their invested pensions to support expenditure over and above Jane’s teacher’s pension income.

By that point, based on conservative rates of growth, their home will have risen in value, John’s pension will have increased in value as will Jane’s, and they will still have in excess of £150,000 sitting in the bank.

Jane and John’s combined estate will be worth about £1.5 million and it will continue to grow from there – with State Pensions in payment, they will draw a lot less from cash and pensions and so will see them grow at a faster rate.

Engaging with a financial planner will help Jane and John establish their position now and assess the long-term impact of future actions. It will also mean they can continue to review their position as their circumstances – and legislation – evolve.

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