Widespread confusion around inheritance tax (IHT) means millions of over-55s are at risk of leaving families with a potentially significant tax bill to be paid from the deceased’s estate, new research has shown.

Findings published by abrdn found that a third (32%) of UK adults over the age of 55 – a figure that equates to 16.4 million people – are unaware of whether or not their families could be left to pay a tax bill when they pass away.

abrdn’s research, based on a 2,000-person sample size aged 40 and above in the UK, of which 997 were over 55, also found that 29% of over-55s don’t think their wealth is large enough to need advice on IHT.

However, when asked to value their current wealth, on average individuals estimated they would have a total of £354,000 in assets – which is above the IHT threshold of £325,000 and is double for married couples. In London, the average estimation jumped to £556,999.

The findings come as HMRC has reported a 24% increase in the number of people paying IHT in the 2022/23 financial year. In April and May alone this year, £1.2bn was paid to the Government in IHT – an increase of £100m on the same period in 2022.

Financial planning expert at abrdn, Shona Lowe, said: “IHT is no longer the ‘wealth tax’ it once was. Thanks to years of soaring property prices across the country, alongside the freeze of the nil-rate band until at least 2028, more people are likely to be liable.

“The confusion is putting millions at risk of being hit with an unexpected, and potentially considerable, tax bill after the death of a loved one.”

abrdn’s research has highlighted common confusion around wealth planning, heightening the risk of millions of families incurring unintentional tax liabilities. The findings showed that 78% don’t understand the residence nil rate band – an additional allowance that can increase the amount up to which an estate has no IHT to pay – while seven in 10 (70%) of the over-55s surveyed admitted they don’t know how to reduce IHT bills for their loved ones.

More than half (51%) of over-55s also said they didn’t know how to start to value their property, savings and investments to understand how IHT could apply to them.

Misunderstandings around IHT rules was found to be a factor preventing people from seeking support around planning, whether from friends, family or a professional financial adviser.
abrdn also revealed that one in eight (12%) of the third (32%) who hadn’t spoken to anyone about what to do with their money after they pass away said they hadn’t done so because they weren’t confident they understood IHT.

Lowe added: “It’s a human instinct to want to pass on as much as you can to your loved ones and understanding the rules around IHT can help you reduce, or even getting rid of, that tax bill. Whether that’s using gift allowances which allow an individual to pass on money to loved ones, establishing a trust or making use of business relief the ‘right’ way depends entirely on your individual circumstances.

“Navigating IHT can be complicated and daunting but it’s a reality of life for more and more people so it’s something to grasp and talk about with loved ones. Our latest research found people feel more comfortable talking about their health problems and politics, than money. But, the sooner you kickstart the IHT conversation, whether that’s with family, friends or a financial adviser, the better.”

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