Are you banking on an inheritance to help pay off the mortgage, clear your credit card bills or prop up your pension plans?
If so, you are not alone. A recent survey suggests the majority of people in the UK are optimistic about receiving a generous inheritance, with seven out of ten saying they expect to inherit their parents’ or grandparents’ home.
The survey by vouchedfor.com – a company that puts people in touch with lawyers, accountants and financial advisers – found that six out of ten respondents said they expected to receive a future inheritance, and one in ten of them expected it to be large enough to fund a comfortable retirement.
With strong rises in house prices over the past decade or so, it is perhaps not surprising those in their 30s, 40s, and 50s remain hopeful that a future windfall could prove to be a financial cure-all.
Most in this age group don’t have the generous pensions their baby-boomer parents got. Many are also saddled with larger mortgages and more job insecurity than the generation before. In addition, some may be wondering how they will ever help their own kids get on the property ladder or pay off university fees.
Unfortunately, there is often something mirage-like about these inheritances: the closer you get, the less and less substantial they seem.
What is the average inheritance?
Finding out the average inheritance isn’t a straightforward task. The Ministry of Justice, which runs the Probate Office, doesn’t publish this data. However, HMRC does collate information on the value of estates and the tax due on them. According to its most recent data — for the tax year 2013/14 — there was a total of £77.13 billion left in people’s estates, after mortgages and any other debts have been paid.
The figures from HMRC show there were around 599,000 estates included in these figures (which tallies with figures from the Office for National Statistics for deaths in that year). This makes the average estate worth around £137,980.
This is certainly a reasonable sum of money, and one that would help put many people’s finances on a firmer footing. But averages can be misleading. A spokesman for HMRC points out that many smaller estates, where inheritances are less than £5,000, won’t necessarily be included in these totals.
A spokesman from the law firm Pinsent Masons explains that these are pretty approximate figures. He points out that because a small number of people leave extremely large estates this can skew the average upwards. The reality is most people won’t get an inheritance that is anywhere near this ‘average’.
This is borne out in a separate piece of research by the Office for National Statistics. In its wealth and assets survey the ONS asked people about inheritances they had received in the last two years. Only one in ten of those who’d received an inheritance said it was for more than £125,000. In contrast half of those pocketing an inheritance got less than £10,000.
Still, it seems fair to say that in recent years the average amount people receive, via an inheritance, has increased. This is largely due to rising house prices and slightly more generous inheritance tax allowances.
How does inheritance tax work?
Since 2007, married couples (and civil partners) have been able to transfer any unused inheritance tax allowance. This effectively means that couples can pass assets worth £650,000 to their children — or other friends and family — without any inheritance tax being applied. Usually this 40 per cent tax kicks in on estates worth more than £325,000.
This change, coupled with a fall in house prices after the financial crisis, led to a significant drop in the amount of IHT collected by the government. Figures from HMRC show that it collected £2.3 billion in 2009/10 and £2.7 billion in 2010/11 — down from the £2.8 billion in tax receipts collected before this change.
However, since then the amount received has risen steadily year after year. In 2015/16 the Exchequer collected £4.67 billion in inheritance tax, a 22 per cent rise on the year before. HMRC itself notes that ‘without adjusting for inflation, this is the highest that IHT receipts have been since the current inheritance tax system was introduced, back in March 1986’.
This has been helped by the fact that this IHT threshold hasn’t budged since 2007 and has stayed stubbornly at £325,000 (or £650,000 for couples). But during this period house prices have soared in value, as have many other assets, from stock market investments to classic cars and fine wines. As a result more estates will be dragged into the IHT net.
The cost of care
But the fact remains that the taxman isn’t the biggest threat to a future inheritance. It remains the case that only around 4 per cent of estates actually pay IHT. This is partly because with a bit of tax-planning it’s quite easy for the seriously wealthy to avoid this tax altogether, by giving away assets. It tends to be the middle-income earners, whose wealth is largely tied up in the family home, that have the least room for manoeuvre when it comes to this type of tax planning.
The biggest threat to leaving an inheritance is the increasing need for healthcare as people age, and the sky-high cost of this. Far more people are now living into their 80s and 90s. A significant proportion of these will need assistance at home, or full-time support in a nursing home.
This cost should not be under-estimated: annually the price of a fairly average nursing home is on a par with fees charged by Eton. And in most cases individuals will be left to pay the lion’s share of these fees themselves.
This situation is likely to get worse as people live longer and the next generation reaching retirement have less well funded pensions. It is perhaps a sign of the times that the number of people taking out equity release loans, which allow retired people to borrow against the value of their home, has soared in recent years.
In the good old, bad old days it was possible to take out an interest-only mortgage and say you hoped to pay it off with an inheritance. No further evidence was required. Today no bank would lend on this basis.
So, if you are still years away from your own retirement, it’s time to start saving. The government is rolling back on pension promises. And by the time the Bank of Mum and Dad matures into the Bank of Granny and Grandad there’s likely to be a serious run on funds.
Emma Simon is a freelance consumer journalist and former Personal Finance Editor at The Sunday Telegraph