Two of the most enduring myths in personal finance are that (a) people work their guts out to pay for a home that jumps in value to hundreds of thousands of pounds and (b) that the nasty taxman will, when they die, snatch the money they wanted to leave to the kids.
A report from Prudential this week explodes that second myth comprehensively. The Pru’s research suggests that fewer than three in 10 people will leave any sort of inheritance, and those that do will average just £191,000. That is far below the current threshold for paying inheritance tax (IHT), which is £325,000 for a single person and twice that for a married couple, so not a penny from their estates will be heading into HM Revenue & Customs’ (HMRC) coffers.
When it comes to myth (a), the reality is that house price gains have little to do with toil and more to do with random chance. Tenants happen to work hard, yet they don’t see a penny of the huge price gains gifted to their landlords. Homebuyers in the north-east of England no doubt work hard too, but have seen virtually no increase in the value of their properties. Yet lots of property owners in the south believe it’s their own efforts that have caused their property to inflate in value, and how dare HMRC take a bit of it? The truth is that the land their house sits on has exploded in value, largely due to population pressure and loose lending, not because the colour scheme they chose was especially attractive.
But given how far house prices have jumped in the south, the puzzling thing is why so few people expect to leave money to their children. The Pru’s research found that in 2011, just over half (52%) of all people retiring were expecting to leave a decent cash sum to their heirs. Five years later, despite big house price rises, only 28% of people now expect to be able to leave anything.
The reason? The money is already being taken by the kids. “More than a third (35%) are already providing regular financial handouts to family members, worth an average of nearly £250 each month or almost £3,000 a year. Meanwhile, nearly one in seven (13%) are paying more than £500 a month to support various family members,” says the Pru.
Much of the money is going to support younger adults with impossibly high rents and mortgages. “These research results show that the concept of the ‘bank of mum and dad’ is already out of date – many of this year’s retirees must feel like the bank of son, daughter, grandson, granddaughter, partner, granny and grandad, all rolled into one,” says Stan Russell, a retirement income expert at Prudential.
In the nationwide panic over inheritance tax – David Cameron’s 2007 vote-winning pledge to raise the threshold to £1m is cited as the main reason why Gordon Brown flunked a decision to call an election – the only real winners have been the very well-off.
The £1m threshold (for couples) will come into force in April 2017. The chief beneficiaries of this tax cut will be a tiny number of the sons and daughters of the propertied rich. In 2015-16, only £4.7bn was raised in IHT, which now brings in little more than the tax you pay on your car insurance. Even less will be collected in the next tax year when the £1m giveaway comes in. For the vast majority of today’s workers reaching retirement, their concern should not be about being caught out by IHT, but more if they will have enough to survive retirement.
• With summer finally on its way the last thing that’s probably on your mind is gas and electricity bills. However, it should be, according to Joe Malinowski who runs the energy switching website TheEnergyShop. The keen observer of the energy market has effectively called the bottom of the market, and says prices are only to set to rise from here on in. If he’s right – and he does have a pretty good track record – there’s only one conclusion. Now is the time to switch supplier.
