Heir today, gone tomorrow. Perceptions and attitudes towards estate planning by the affluent. Trends in Wealth volume two

Transcription

1 Heir today, gone tomorrow Perceptions and attitudes towards estate planning by the affluent Trends in Wealth volume two

2 Foreword Trends in Wealth Heir today, gone tomorrow Welcome to the second report in our Trends in Wealth series, Heir today, gone tomorrow designed to explore the current concerns, expectations and planning of the affluent. With a growing amount set to be paid in inheritance tax (IHT) across the country, and the threshold frozen despite inflation, inheritance planning is becoming an even more important issue. This is especially true for those who have personal assets of more than 325,000 to allow the transfer of wealth to the next generation to be as smooth as possible. For this to take place, education and early planning is vital. This report, by surveying those who have personal assets exceeding the inheritance tax threshold, seeks to assess the attitudes and understanding of affluent individuals when it comes to inheritance, their exposure to the tax, and actions that have been taken to mitigate it. This report seeks to highlight how it differs by geography and age, and casts a light on the apparent apathy, misunderstanding and planning inertia displayed by many. Basis of the report This report extracts the key findings from a survey conducted by the independent research company Watermelon Research, on behalf of Close Brothers Asset Management between 20 and 27 of November The survey was conducted online and the questions were put to a sample of over 1,000 adults in the UK with personal assets over 325,000. Additional statistics are sourced from the latest data from the Office of National Statistics. We hope you enjoy reading this new report. Andrew Fay Head of Wealth Management Close Brothers Asset Management 2

3 Contents summary The impact of inheritance 4 Inheritance is a crucial component of the personal finances of the UK s population, with more than 75bn changing hands every two years through inheritance Large inheritances are commonplace, with 160,000 people inheriting more than 125,000 in a two-year period Affluent individuals who have benefitted from inheritances have received circa 130,000 in their lifetime Perceptions 5 Widespread lack of awareness of the 325,000 inheritance tax threshold, with just 46.8% stating it correctly Two thirds unaware of Business Property Relief, and 18% unaware of the seven-year gifting rule Actions 6 More than a third have yet to make any plans to protect assets from inheritance tax Nearly a fifth only made ad hoc plans after a significant event 43% have never sought professional advice on inheritance tax issues The changing use of transferred wealth 7 57% expect beneficiaries to use inheritance for investing and saving, down from 67% of respondents who themselves received an inheritance and invested or saved it 38% of respondents expect beneficiaries to put inheritance towards the cost of day-to-day living Regional divide 8 North West most likely to have considered processes involved in passing on assets Only 38% of affluent Londoners aware of threshold, yet have highest liability Mind the (middle-age) gap 10 Middle-age groups (34-54 year olds) least likely to consider process for passing on assets Just 31% of year olds unaware of seven-year-rule Half of over 60 year olds know the inheritance tax threshold 3

4 The impact of inheritance Inheritance forms a crucial component of the personal finances of the UK s population, both for those inheriting wealth, and those planning to pass it on. Given the rising life expectancy and associated costs of long-term care, protecting the size of an estate to pass on will be more crucial to support the wealth of future generations than ever before. The latest data from the ONS suggests that at least 75bn is inherited in the UK every two years, and large bequests are far from uncommon. It is the larger bequests that are underpinning the level of wealth transferred to subsequent generations. Analysis of the same findings shows that in the same two-year period, 160,000 separate individuals inherited more than 125,000 in the UK. Our research highlights that those who now have more than 325,000 in assets and inherited wealth have received an average 130,000 in their lifetime so far. As property prices climb and share prices move upward, inheritance tax will have a disproportionate impact on the affluent, and an increasing amount of assets will become taxable through inheritance tax. Grant Thornton forecasts that the number affected by the tax will double by 2016/17, rising from 21,000 in 2012 to 42,000. In fact, in its latest figures, the Office for Budget Responsibility (OBR) estimates that with the inheritance tax threshold frozen at 325,000, the Treasury s tax take will climb by 60% in the next five years, climbing from an estimated 3.5bn in 2013/14 to 5.6bn in 2018/19. Transferring one s wealth is not just about giving away cash in current and savings accounts. A beneficiary of products such as life assurance policies, retirement plans and other such schemes will also receive money that must be planned for. Whilst many are accustomed to writing a will to allocate possessions and more obvious assets such as savings to various individuals and organisations, it is also sound advice for an individual to understand the full extent of what makes up their transferrable wealth to comprehensively plan for future inheritances. Forecast IHT tax take Billions ( ) Year *Source: OBR. December In this context, understanding inheritance tax liabilities, and planning for the most tax efficient means for passing on wealth to the next generation is a pivotal part of financial planning. 4

5 Section 1 Perceptions Clued up on thresholds? In spite of the growing impact of inheritance tax, a lack of understanding of the threshold by those who will be liable is worrying. The majority of respondents to our survey were unaware of the inheritance tax threshold, with less than half (46.8%) correctly stating 325,000 when asked. On average one in seven of those with assets exceeding this wrongly assume the threshold to be 500,000, while 5% didn t think the threshold was relevant to them. As a result, many may not even understand that they need to address this liability with appropriate and professional planning. The average personal wealth of respondents stood at 881,500, meaning the potential inheritance tax charge without any estate planning would be 222,600 (40% of the net estate after deducting the inheritance tax allowance). Even married affluent individuals could see their estate eventually face significant tax charges despite transferable allowances. The current HMRC legislation allows the transfer of any unused IHT allowance to the surviving spouse or civil partner. This can increase the IHT allowance of the surviving partner from 325,000 to a maximum of 650,000 in However, the average wealth of married respondents was 909,000, meaning the potential inheritance tax charge without any estate planning would be 103,600 (40% of the net estate after deducting their own inheritance tax allowance as well as the unused allowance transferred from their partner), without even factoring in their spouse s personal assets. Get smart, get planning As planning becomes all the more imperative, there is a clear knowledge gap on several tactics to help avoid unnecessary taxation, such as scheduling the distribution of wealth. Awareness of the seven-year gift rule was strongest, but nearly one fifth of affluent respondents (18%) were still unaware that gifts made to individuals remain entirely exempt from inheritance tax as long as the person lives for seven years after making the gift. However, there was significantly less awareness of Business Property Relief. 66% were unaware of this tax saving measure, which can be claimed on the transfer of many types of business assets such as Alternative Investment Market stocks, provided they have been held for two years. While it can be a viable option, using Business Property Relief for IHT planning is also considered a medium to high risk solution and individuals should seek professional advice. Unaware Aware Awareness of seven-year gift rule Awareness of Business Property Relief 0% 20% 40% 60% 80% 100% Estimate IHT threshold 5% 2% 9% 23% 3% 11% 47% Do not know Do not believe relevant 125, , , ,000 1,000,000 The process their beneficiaries face to unlock wealth passed on proved another stumbling block for affluent individuals. 27% of those with assets over the tax threshold were unaware that assets left for beneficiaries may not be available for distribution until their inheritance tax bill is settled, with a further 17% aware but not having made any plans to address this. In total, just 56% were both aware of the issue and will have plans in place. This approach represents a slight improvement on proactive planning by those passing their wealth on; given that 52% of the same respondents had to pay the tax on wealth they inherited before they could access it. 5

6 Section 2 Actions Estate planning is by definition unique across every estate. Given the different sizes and types of assets, action undertaken for one estate will be different to that of another, not to mention eligibility for different reliefs. However, the unifying theme is the need to plan early, yet we are still seeing inertia among the affluent. Financial planning on the hoof More than a third of those with assets over the threshold (34%) have yet to put any plan in place to protect their assets from inheritance tax. More worryingly, 32% don t think they need to do anything in the future to protect their assets. Given the lack of understanding of the threshold, and steps to take to reduce exposure, an increasing number of estates could face unnecessary taxation. Equally, a failure to regularly review estate planning may sow the seeds of trouble further down the line. While 31% review their plans for passing on their assets annually or more frequently, nearly a fifth of respondents (19%) do so only when a significant event creates an immediate need to address their finances. Best Practice planning in action Though our research shows a widespread apathy to inheritance planning among many of the affluent, it is by no means universal, and many have taken prudent steps. More than one in nine (12%) have already given financial gifts from their income, with 18% setting up trusts for their children. The majority of people discuss their finances with their significant other, with three quarters (75%) reporting that they have talked about passing on their assets with a partner. Though 41% admit to having spoken with a solicitor over wealth distribution, and a further 22% to a financial planner, just 16% have made, or will make a single plan for retirement, potential care costs and inheritance tax. Approaching these three long-term financial considerations is advisable, given that planning on one of the three elements will have knockon effects on the other two. Around a third (31%) state that they will make individual plans. Despite the large sums involved, and by extension their exposure to inheritance tax, 43% have never sought professional advice such as from a lawyer, accountant or a financial planner. Most concerning of all is that one in ten (11%) have never discussed passing on their wealth with anyone at all. 6

7 Section 3 The changing use of transferred wealth While the intended beneficiaries of inherited wealth are as might be expected (with an individual s family remaining the top recipient), what individuals now expect their legacy to be used for reflects the impact of the rising cost of living even on affluent individuals. 57% expect their beneficiaries to place their new wealth into savings or investments such as shares and bonds. This compares with the 67% of respondents who themselves inherited wealth and were able to save it or invest it in the same manner. 38% of affluent respondents anticipate the wealth they pass on will be used towards day-to-day living costs, while just 23% needed to use inherited wealth to meet living costs. The same increase is seen in the money being used to reduce debt, with 21% expecting inherited wealth to be used to pay down debt, higher than the 18% who actually used their inheritance in a similar way. Additionally, as a result of rising house prices, more than a quarter of respondents (29%) now expect a portion of any inheritance that beneficiaries receive will be put towards buying a home. Top 5 uses for inherited wealth 40% 35% 30% 25% 20% 15% 10% 5% 0% Financial investments Cash savings Purchasing a home Home maintainance/ refurbishment Top 5 predicted uses for future inheritence 40% 35% 30% 25% Day-to-day living costs 20% 15% 10% 5% 0% Day-to-day living costs Cash savings Purchasing a home Financial investments Paying down debts 7

8 Section 4 Regional divides Exposure to inheritance tax, awareness of the threshold and active planning for passing on wealth varies across the UK. The affluent in the North West were the most likely to consider the process involved in passing on assets (87%), while those in the North East had the best awareness of the current inheritance tax threshold (57%). There was a clear tension between wealth and exposure to inheritance tax in London. Affluent London respondents were the wealthiest in the UK, with an average of 1.33m in assets, 441,500 more than the national average. The speed at which property prices have risen, as well as higher wages, have played a part in this disparity. The average house price in London is now 434,000, 77% higher than the UK average, according to analysis of ONS data. However, despite being the most exposed to inheritance tax, just 38% of those living in the capital could confirm its threshold, the second lowest in the UK (after Wales). Awareness of current IHT threshold 60% 55% 50% 45% 40% 35% 30% 25% 20% North East North West Yorkshire & The Humber East Midlands West Midlands East London South South Wales Scotland Northern East West Ireland 8

9 29% aware of current inheritance tax threshold, lowest in UK 92% Most knowledgeable on the seven-year rule to mitigate inheritance tax Scotland North East 57% Most aware of current inheritance tax threshold North West 87% Most likely to consider processes involved in passing on assets Yorkshire and The Humber 86% Most likely to discuss asset planning with a spouse One in three have spoken to a financial planner about IHT planning Northern Ireland North Midlands 16% Most likely not to discuss passing on assets with anyone One in five have set up trusts for their children Wales South West East South East Just 38% of London-based respondents aware of inheritance tax threshold East Midlands 75% Most likely to pass assets onto a spouse West Midlands Less than 1 in 10 aim to make use of all allowances to mitigate inheritance tax, lowest in UK 43% expect beneficiaries to spend inheritance on day-to-day cost of living 9

10 Section 5 Mind the (middle-age) gap While older members of the affluent have been more active in planning for passing on wealth, and a proportionally high number of the youngest generation have considered future wealth transfer, there is a clear preparedness gap among those in their middle years. Almost all over 65s (92%) have considered the process involved in passing on their wealth and assets and encouragingly so have a sizable majority of year olds - 82%. However, those in the middle-age brackets, aged from 34 to 54 years are the least prepared, with just 72% having considered the process at all. Equally, the age group showing least knowledge of the seven-year gifting rule are year olds. Less than a third (32.5%) of this age group were able to state the current inheritance tax threshold. Overall, knowledge of the tax threshold increased in the older age brackets. 56% of year olds and 50% of those over 65 years of age correctly specified the point at which inheritance tax may be applicable. Consideration of process of passing on assets (years) 95% 90% 85% 80% 75% 70% 65% 60%

11 Section 6 Conclusion It s clear that attitudes towards inheritance tax and planning to pass on wealth vary among the affluent depending on geography and age. Yet there is a clear common theme. As the value of assets rise, and the inheritance tax threshold remains frozen, inheritance tax receipts are becoming an increasingly important income stream for the Treasury. Equally, with living costs rising, and wage growth sluggish, inherited wealth is growing in importance to the affluent. In this context, it is crucial that the awareness gap among those whose estates will be liable for inheritance tax is plugged, so they understand their tax exposure and what steps can be taken to plan for transferring wealth as efficiently as possible. Early planning steps are vital. Making provision for passing on wealth should be as ingrained into regular financial planning as funding retirement to ensure that the next generation benefit as much as possible from what the current generation leaves behind. 11

12 For further information: Media relations: Dan Pike / Kelly Hollidge Teamspirit PR Tel: CBAM@teamspiritpr.com PR enquiries Janine Bunker Close Brothers Asset Management Tel: Janine.Bunker@closebrothers.com Financial planning enquiries Michael Alabaster Close Brothers Asset Management Tel: Michael.Alabaster@closebrothers.com Issued by Close Asset Management Limited (Company No ) which is registered in England and Wales, is authorised and regulated by the Financial Conduct Authority and is a subsidiary of Close Brothers Group plc. Close Asset Management Limited uses the trading name Close Brothers Asset Management. Registered office at 10 Crown Place, London EC2A 4FT. CBAM2651