Those hoping to fund retirement through inherited assets could be in for a shock. *********** Marketing people are forever coming up with new handles to pigeonhole social groups. First we had the baby boomers, those rapidly approaching retirement age who have enjoyed 60 years of unprecedented wealth and are heading towards an equally golden old age. Then came Thatcher's children, the spawn of the late 1970s and 1980s whose "greed is good" attitude was personified by Harry Enfield's Loadsamoney character. Next we had the X generation, those born between 1965 and 1977 who are keener to pursue jobs that make them happy and fulfilled rather than rich. So-called Ski-ers - pensioners "spending the kids inheritance" - were the next marketing ploy, rapidly followed by the DIY-generation. This latter demographic group are today's 18 to 35-year-old school leavers and graduates with nothing to look forward to except financial trauma. They, more than their predecessors, are having to fend for themselves financially, but are relying on some form of inheritance to cushion them against future money problems, most notably in retirement. Not long ago, banking on an inheritance to boost personal wealth was impossible for most people. For a long time it was the preserve of only the seriously rich. But all that changed in the second half of the 20thCentury as personal wealth grew dramatically. It was this rapid growth in inherited money that led former Prime Minister John Major to say that wealth was "cascading" down the generations. According to Newcastle-based stockbroker Wise Speke, 27% of Britons who are anticipating an inheritance are relying on it to fund their retirement. Of those, 60% cite the collapse of their pension expectations as the reason. The figures are contained in Wise Speke's second annual National Inheritance Survey. But those anticipating using an inheritance to fund their retirement could receive less than anticipated. There is mounting evidence that the tide is turning and that the inheritance pot is on the verge of drying up. In short, the money which would once have been set aside to be passed on to the next generation is, out of necessity, being used to fund retirement. As life expectancy continues to rise, retirement income is increasingly stretched to the limit. Savings and home equity are being dipped into more and more to help with the costs of a long retirement and sometimes, with expensive long term care. With life expectancy predicted to grow even further, this leaves retired people with less money to pass on, and DIY-ers with further pressure to fend for themselves. But there is another reason why this group may inherit less than they expected. According to Wise Speke, 23% of adults are not aware inherited assets are subject to 40% tax if they are worth more than the current £275,000 threshold (increasing to £325,000 over the next four years). Vinay Bedi, director and fund manager at Wise Speke, a division of Brewin Dolphin Securities, says: "We are concerned that millions of people are unaware of how hard they are going to be hit with an IHT bill. The lack of awareness that there is a relatively small tax free threshold and then a liability of 40% tax will come as a nasty shock to an increasing number of families with modest assets." Wise Speke says those planning to leave an inheritance are also failing to investigate the opportunities that exists to lessen the impact of IHT - 60% of Britons who intend to leave money have not carried out any tax planning, although Chancellor Gordon Brown clamped down on trusts sheltering family assets in the Budget. Last year the Government received more than £3bn through IHT, capitalising on the lack of awareness about this tax among the public. As an example of just how iniquitous this tax is, a brother and sister, the children of a retired couple whose family home was worth £250,000 in 1997 would find that the same property would be worth nearly £600,000 today - an increase of 160%. Had the children inherited in 1997, the tax on the property part of their parent's estate would have been £20,000. Today the tax they will have to pay would be nearly £154,000 - an eightfold increase. Were the IHT nil-band to have been increased in line with average house prices over the same period, the tax payable on the parent's property would be £52,000 - £102,000 less than they would pay today. According to Vinay Bedi, the problem of relying on an inheritance is compounded by inadequate pensions planning. A staggering 71% of people with a pension have not increased their contributions following the Government's decision in 1997 to remove the tax relief on such funds, increasing the likelihood of savers facing an even larger pension shortfall. This leaves DIY-ers stuck between a rock and a hard place. A combination of paying for student debts for longer, taking on larger mortgages, and having children later in life, will mean there will be few financial commitment-free stages in a DIY-ers life. But the IHT threat is one shared by baby boomers and DIY-ers alike. So unless they can find a way to dodge the tax, retired people hoping to leave a decent inheritance could see a large chunk of it disappear. And it is anyone's guess what will happen when the DIY-ers finally get to retire. Planning how to avoid paying 'double tax' Andrew Walton was 40 when he decided he had to sort out his family's inheritance tax position. "I think it is an age thing," the 43-year-old director of Newcastle-based Connect Physical Health Centres Ltd, says. "Fifteen years ago when people started talking about pensions I saw it as being too far in the future. "That was pre-children, but then you realise you need to start looking to the future, so you get a pension. Then you hit 40 and you think, `I've going to die one day. I have assets and I need to protect them for my children.'" Andrew lives in Forest Hall, North Tyneside, with wife Bronwyn, 44, a physiotherapist, and Ciara, 13, Connor, 11, and Colette, nine. His assets - that include his semi-detached home - take him just over the current IHT level. But last year with the help of his independent financial adviser, Andrew set up a nil rate band discretionary trust to protect his assets for his wife, children and potential grandchildren. As part of this, Andrew and Bronwyn have changed the ownership of their home from joint tenants to tenants in common to ensure that both nil-rate bands are utilised for IHT purposes. This means that up to the £275,000 nil rate band passes into trust on the first death on terms that enable the surviving spouse to access income or capital on a discretionary basis, but where it is not regarded as part of the estate. "Our pensions will be part of the trust and we have put as much in as we can," Andrew says. "It's out home, pensions and business I am worried about. God knows what they will all be worth in 20 years time - hopefully a lot more than they are now." Potentially Andrew could be hit by Chancellor Gordon Brown's new "stealth tax" on IHT trusts, and he will be talking to his financial adviser about his position. "You pay taxes all your life, then you have to pay when you die. It's paying double tax, and I want to avoid that," he says. How to cut your IHT liability Make a plan Work out if IHT is likely to be an issue by adding up the value of all your savings, investments, property and personal possessions. If the total comes to more than £275,000 (£285,000 for the 2006-2007 tax year), then IHT will apply at the rate of 40%. Write a will A will lays out your wishes and clarifies who should get what. It will stop any assets being divided under the rules of intestacy, where even spouses are not guaranteed to inherit everything. It can also be the first step to reducing an IHT bill. Many married couples draft wills that pay part of their wealth into trust on death. The surviving spouse can benefit from the legacy, but so can others such as children and grandchildren. The aim is to give the option for both husband and wife to use their full £275,000 IHT allowance on death. Explore trusts Aside from will trusts, several others can help in estate planning, even now that Gordon Brown has clamped down on them. In the Budget he announced that all new trusts, with limited exceptions, will be subject to a 20% IHT charge on lifetime transfers that exceed the threshold. On top of this there will be a 10-year charge of 6% on the value of the trust assets over the threshold, and an exit penalty. The legislation will affect existing as well as new trusts. Accumulation and maintenance trusts and interest in possession trusts are both affected. Brown's announcement came as a bombshell and will undoubtedly increase the number of estates hit by IHT. Clive Scott-Hopkins of Towry Law, says: "This is hugely damaging to the trusts and includes all life policy trusts, for example loan trusts and discounted gift plans." And Sheena Hay of accountants Grant Thornton, adds: "As things stand, this is nothing short of disastrous." But Peter Rutherford of Morpeth-based independent financial adviser Rutherford Wilkinson Plc, says: "It is still going to be worthwhile, but more care is going to be needed when setting them up. IHT planning is now becoming more and more complex, so it is vital people seek professional help." Investments Some investments qualify for favourable treatment for IHT purposes, including shares in unquoted businesses, farms and farmland and woodlands. Give it away Gifts handed over during your lifetime are free of tax unless you die within seven years of making them, in which case they become taxable. There are also various allowances, including wedding gifts of up to £5,000 to your children, or up to £2,500 to your grandchildren and £1,000 to others. All donations to charity are IHT-free. Take out an insurance policy Another strategy is to use an insurance policy to pay off an anticipated future IHT bill. First, calculate what you think your tax liability is likely to be. You can then set up a `whole-of-life' insurance policy to cover that amount. However, the policy must be written into trust, usually for a small fee, to ensure that the proceeds are not included as part of your estate. When the policy pays out on your death, the proceeds can be used to cover the IHT bill. Think about your home For most people, their home is their biggest asset. The Government has clamped down on `gift with reservation' schemes. These allowed people to give away homes, but still live in them. Now, income tax can be charged for living rent-free in a home you once owned. But there are still ways to reduce IHT. Most couples who own a home together are joint tenants. This means that if one person dies, the other automatically becomes the outright owner of the home. The alternative is to register as tenants in common, each owning half the property absolutely. This means that on death, your share may be left to someone else to keep down the size of your estate. Spend it Remember in your rush to save IHT that the money is, after all, yours. If you are worried you are building up too much wealth then why not throw caution to the wind and spend it? Get married One of the easiest solutions to IHT problems, as anything you pass on to a spouse is free of IHT. The same concession now applies to same-sex couples who register under civil partnership laws that came into force last December. However, legacies between unmarried couples are not tax free - a serious problem when a couple jointly own their home. This can lead to people having to pay an IHT bill just to continue staying in their home. | 
Travel, Entertainment & leisure
Professional Services
Health
Home Style
Home Improvements
Fashion & Weddings
Gifts
