Don't let your inheritance get washed away

Clare Francis looks at how to cut tax bills and enrich your family without ruining your lifestyle

Even though the cost of funding retirement is increasing because we are living longer, exclusive research from GE Life reveals that most people over the age of 60 still think it is important to leave something to their children.

"Most elderly people want to pass on a nest egg," says John Whiting, tax partner at accountancy firm Pricewater- houseCoopers. "This is the way they have been brought up and for many it is unpalatable to think that they won't be able to leave their children anything."

Certainly, the GE Life survey reveals that, among the over-sixties, more than two in five people who have children are concerned about chipping away at their assets to pay for residential care. But it seems their children would far rather their parents enjoy their money than worry about what they can leave behind.

One of the big problems highlighted by the research is that death and finances are still regarded as taboo subjects in many families. But the disparity between the views of elderly parents and their children illustrates the importance of discussing these matters.

The Government is increasingly putting the onus on individuals to provide for themselves in retirement. And with people living longer, this can be expensive. One problem for many is that the bulk of their wealth is tied up in their property, yet there is often a reluctance to sell the family home unless it is absolutely necessary. However, Mr Whiting believes that in 20 or 30 years' time, we will have to accept that our house is part of our pension fund. Getting hold of this cash will mean either selling up and moving to a smaller property to release capital, or selling a stake in your home to an equity-release company. We will also have to accept that it may be impossible to bequeath the family home to our children.

Even now, given the sharp increases in house prices, a lot of people have a lot of capital tied up in their home. Not only does it mean that some elderly people are having to eat into this money to fund nursing home costs or just the general costs of living, it also raises issues concerning inheritance tax (IHT).

Traditionally, IHT was regarded as a tax for the rich, but thanks to house price inflation, more and more people are falling into the IHT trap. Estates worth less than £250,000 are exempt but anything above that will be taxed at 40 per cent. With the average house price in Greater London now £214,296, according to the Halifax, you don't have to live in a mansion or have a huge amount of savings to be liable for IHT.

If your estate is worth more than £250,000, you should seek advice on how to minimise your family's tax bill after your death. There are various options available. An increasing number of grandparents are choosing to give money to their grandchildren before they die, for example. You can hand out up to £3,000 a year tax-free. Amounts above this limit are taxed if you die within seven years of making the gift.

You might also consider switching the ownership of your house from "joint ownership" to "tenants in common". This way, you and your spouse can have completely separate shares in the property, each with its own nil-rate band of £250,000, which may make it possible to mitigate IHT altogether. However, Mr Whiting points out that, after they have talked through the options with a financial adviser, many people choose to leave their joint ownership status in place so that the property automatically passes to the surviving partner.

"Many families decide not to alter the arrangement," says Mr Whiting. "With the family home, you can't make decisions based solely on cold-hearted tax issues."

Kerry Nelson, senior adviser at independent financial adviser (IFA) Bates Investment Services, often recommends people take out Whole of Life insurance. While this does nothing to reduce your IHT bill, it resolves the issue of how to pay for it.

One problem with IHT bills is that they have to be paid before probate can be granted, but your beneficiaries can't get hold of your money until this has happened. A life assurance policy will pay out immediately on your death, so IHT can be paid without your family having to worry about how they'll find the money.