The Unaware Millionaire

Andrew Zanelli | Supplied

Meet Alan and Margaret Thompson, a couple in their mid 60s living in Edinburgh. Neither of them would ever describe themselves as wealthy.

They’ve always lived modestly, worked hard, saved sensibly, and raised their two children in the same four-bedroom home they bought 15 years ago for £300,000. Today, that home is worth £700,000. It’s a number they rarely think about.

Like many people in the UK, the Thompsons have quietly become “secret millionaires”.

Now, to be clear: Alan and Margaret aren’t real. Their case is fictitious and all the details are illustrative only. But it’s all based on the very real circumstances of thousands of families across the UK. Their story is typical of the growing number of people who, without realising it, are heading toward a significant inheritance tax (IHT) liability.

Alongside their home, the Thompsons have £80,000 in valuables, furniture, and cars. They’ve saved £150,000 in ISAs over the years, have £20,000 in a building society account, £100,000 in an OEIC, and a £150,000 onshore bond that came from an inheritance from Alan's late parents. Altogether, their estate adds up to £1.2 million. Still, they don’t feel rich. More importantly, they’ve never considered they might have a problem with IHT.

But they do. And they’re far from alone.

The growing IHT trap

IHT used to be something that affected only the very wealthy. But with rising house prices, frozen tax thresholds, and a lack of financial awareness, more and more families are now facing unexpected six-figure tax bills.

Here’s how things might play out for the Thompsons.

On the first death, Alan and Margaret have mirror wills in place, so everything passes to the surviving spouse. Thanks to the inter-spouse exemption, no IHT is due at that point. They also benefit from the transferable nil-rate band of £325,000 and the residence nil-rate band of £175,000, which can also be passed on to the surviving spouse.

That means when the second partner dies, the estate will have a total IHT allowance of £1 million.

However, the Thompsons’ estate is worth £1.2 million. That means £200,000 is taxable at 40 percent, resulting in an IHT bill of £80,000. And that’s without any major changes in asset values or further savings.

And still, the Thompsons wouldn’t describe themselves as wealthy. But HMRC certainly would.

How to avoid the shock

The good news is that with the right planning, much of this tax can be avoided or at least significantly reduced.

1. Get a proper valuation of your estate: Too many people underestimate their estate’s value. Take the time to list everything: your property, savings, investments, personal possessions, and any life cover. You may be surprised by the total.

2. Use trusts and life policies wisely: A life insurance payout can tip an estate over the IHT threshold. But if written in trust, it can sit outside the estate and be used to help pay any tax due. This provides liquidity for beneficiaries without increasing the estate’s liability.

3. Start early with gifting and legacy planning: You can gift up to £3,000 a year tax-free, and larger gifts may also be exempt if you survive seven years after making them. Planning ahead lets you gradually reduce the size of your taxable estate.

Don’t wait until it’s too late

The Thompsons may be fictional, but their situation is not. Across the UK, people who never considered themselves wealthy are leaving behind avoidable tax burdens to their loved ones simply because they didn’t realise what their assets were worth.

Don’t let the “unaware millionaire” problem catch your family out. Speak to a financial planner, assess your estate, and take action early. When it comes to inheritance tax, what you don’t know really can cost your loved ones dearly.