People are expected to inherit increasing sums as their parents have more wealth and they have fewer siblings, new research shows.

And with more Millennials in line for a big windfall we use this article to look at ways of reducing the tax bill associated with an inheritance.

GOOD NEWS FOR CHILDREN OF THE 1980s

Data from the Institute for Fiscal Studies shows that people born in the 1980s will on average inherit more than those born in the 1960s.

For example, it found that the parents of people born in the Eighties have average household wealth of £370,000, compared to £250,000 for parents of those born in the Seventies, when they were at the same age.

What is more, as people are having fewer children there are fewer people to split this inheritance between – as usually the bulk of someone’s wealth gets filtered down to their children or grandchildren, although not always.

This means that on average someone born in the 1980s is expected to inherit £136,000 on average, compared to £66,000 for people born in the 60s.

However, it may well be that because parents of those born in the 80s have more money they are inclined to spend more of it during their lifetime, and so leave less for their children.

With people set to inherit more, how can parents reduce their inheritance tax bill?

Make use of gifts: Everyone has a set of allowances they can use each year to remove money from their estate for inheritance tax purposes. You can give away up to £3,000 a year per person, so £6,000 for a couple, and you can use any unused allowance from last year. 

On top of this you can gift £250 per person – and do this as many times as you want. You can also gift money out of your income – and so long as you can show it hasn’t affected your lifestyle can be unlimited. There are also other gifts for certain occasions, like weddings, gifts to charities and paying to help with an elderly relative or minor’s living costs.

Don’t get caught in the residence small print: Everyone now gets an additional inheritance tax-free allowance if they leave a property as part of their estate. In the current tax year this is £175,000 and is on top of the usual £325,000 nil rate band for inheritance tax.

It means an individual leaving a home can leave an estate worth £500,000 entirely inheritance tax free, or £1m for a couple. But, you only get the extra home allowance if you leave the money to certain people, classed as ‘direct descendants’.

So this is children, grand-children or step versions of those. If you plan to leave money to people outside of those individuals you should structure your estate carefully. For example, let’s assume someone had a £500,000 estate made up of £250,000 in investments and a £250,000 property.

If they wanted to split the estate between their daughter and their niece, they should leave the property to their daughter, meaning it qualifies for the residence nil rate band, and the investments and savings to their niece.

By doing it this way there would be no inheritance tax due, whereas if they left the property to the niece they wouldn’t get the additional £175,000 allowance and so there would be an IHT bill due on the estate.

Don’t needlessly take money out of your pension: Pensions are now very tax efficient when it comes to inheritance tax. Any money left in a pension is not considered as part of your estate for inheritance tax purposes. This means that if you don’t plan to spend the money you should leave it in your pension for as long as possible.

Everyone can take 25% of their pension pot free from income tax, meaning that many people think they should automatically take this sum when they retire. However, once you’ve withdrawn this money it sits outside your pension and so would be counted as part of your estate for inheritance tax purposes. If you don’t need access to it right away then you could be better leaving it in your pension until you do.

Invest in small companies: Investments in companies listed on the AIM stock market are exempt from inheritance tax so long as certain criteria are met.

If you’ve got a large estate and are willing to take more risk with your investment portfolio, this can be a way of sheltering some money from IHT.

In a nutshell, if you invest money in AIM shares that meet certain criteria set by the taxman for at least two years, that money can be passed on upon your death without that windfall cash being subject to IHT. Though to avoid putting money in shares which don’t qualify this may be best left to specialists which will pick the investments for you.

Leave money to charity: Any money you leave to charity is free from inheritance tax, but if you leave enough to charity you can reduce your remaining IHT bill.

If you leave 10% of your estate to charity you will only have to pay 36% IHT on the remainder of your estate above your nil rate bands, rather than the usual 40%.

LONGER TO WAIT

While there is more money for the 80s generation to inherit, they will get that later in life as we’re all living longer. The IFS found that the average age of someone born in the 1960s when their last parent dies is 58, compared to 64 for those born in the 80s.

Many people will receive the bulk of their inheritance when their last parent dies, although some will get it throughout their lifetime.

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