People who start planning at 50 could pass on thousands more
Delaying the start of your estate planning could come with a significant cost(Image: GETTY)
Families could be losing thousands in ‘preventable’ Inheritance Tax costs according to money experts after a new report found that delay one single decision by a few years could have a much higher cost than people expect.
With unused pensions due to be included in Inheritance Tax calculations from next year, millions of families who never expected to pay inheritance tax could find themselves caught up in the 40% bill. This comes after new figures showed nine in 10 UK postcodes have more estates that will trigger IHT bills than they did five years ago.
New Octopus Investments research found that when you start your estate planning could have a significant impact on how much your able to leave to your loved ones. Modelling affluent families who start the process at the age of 50, it found they could pass on £397,000 more to their loved ones compared to those who make the “quiet” decision, or indecision, to not start planning until they hit 70.
Outside of the financial hit late planning can take, the research also found emotional costs of the delay as nearly seven in 10 financial advisors say they’ve seen tax or family conflict because estate planning was started too late. Advisors added that many clients delay starting the process because they think they are ‘too young’ or struggle to have conversations about death and their legacy.
Kristy Barr, Head of Retail Investments at Octopus Investments said: “The biggest threat to a family’s legacy isn’t tax – it’s the conversation that gets postponed. Most of the wealth lost to inheritance tax isn’t lost to bad planning.
“It’s lost to no planning, by families who genuinely meant to get round to it or people who simply didn’t realise they had an inheritance tax problem.”
The new research focused on affluent families in the top decile of UK wealth after the pension changes begin next year, noting that actual outcomes will depend on each household’s individual circumstances. It found these wealthy families could lose an estimated £12.3billion in ‘preventable Inheritance Tax’ once pensions enter Inheritance Tax liabilities next April.
The controversial change will see unused pension funds included in the value of your estate for Inheritance Tax purposes. It is meant to prevent pension pots from being used as a way to transfer wealth generationally without facing Inheritance Tax as it’s currently exempt.
Even without this change in tax policy, the research showed families that passively wait to start estate planning may be passing on £258,000 less on average than those who start estate planning early.
Inheritance Tax is paid at a flat rate of 40% on estates valued at over the threshold of £325,000. However, there are some exemptions that can stop your estate over this value from being taxed and acting on these strategies sooner rather than later could add up to thousands according to the research commissioned by Octopus Investments.
The report, 50nomics: the evidence behind earlier estate planning, also discovered that many people are mistaken about when they actually start estate planning. UK adults said on average that it should start around 44 years of age, while financial advisors say clients usually start around 61 years old.
86% of those in their late 40s admitted they hadn’t done any estate planning at all and this only dropped to 70% for those in their 50s.
Kristy added: “Our research indicated the difference between affluent families starting their planning at 50 and starting at 70 is, on average, nearly £400,000. Multiplied across the country, that is billions of pounds in legacies left on the table.
“For most families, the decision to wait feels like the safer one. 50nomics puts a price on that quiet decision — and a value, for those who act, on starting the conversation sooner.”
