Partner Content by Octopus Investments

The families being impacted by inheritance tax

Spiralling inflation at the same time as frozen inheritance tax allowances is having significant consequences for families across the UK.

It’s sprung financial advisers into urgent action. There is a pressing need to revisit clients’ estate planning. Equally, many more clients are at risk of being dragged into the net, sparking need for fresh advice.

Let’s look more closely at what’s driving this need for advice.

The nil-rate band has been frozen for more than a decade at £325,000, while the residence nil-rate band is £175,000. Both are fixed until 2026.  Because the nil-rate band has not increased in line with inflation, it has had sizeable implications for inheritance tax. PwC calculate that if the £325,000 allowance had instead rose in line with inflation every year since 2009, it would stand at £478,078. This would have allowed a further £153,078 to be left to loved ones tax free.

In fact, UK families are set to pay £37 billion in inheritance tax over the next five years alone. This includes an extra £2.5 billion in receipts revealed in revised forecasts by the Office for Budget Responsibility in March 2022 which accounted for rising inflation.

Interestingly, inheritance tax receipts figures have been consistently higher than forecasted since June 2010.  This is partly due to stronger average house price inflation from March 2013 forecast onwards. But it also reflects under-estimates in forecasts for the average value of estates subject to inheritance tax. It begs the question, could your clients be underestimating the value of their estates?

There is an increasing estate planning advice opportunity. To meet that need, it will help to keep Business Relief front of mind.

The rising cost-of-living and estate planning

Many clients affected by inheritance tax will recognise they are in financially strong position and will proceed with estate planning.

But what happens if some clients are held back from estate planning due to concerns about cost of living? The question might come up, “Can my client afford to do more estate planning while providing for the rest of their life?”

This could be an objection that arises in an inflationary environment, where some clients will have worries about how much money they’ll need in later life. It’s very common for clients to overestimate how much they’ll need to live on in retirement. It’s no different when it comes to IHT planning.

Making lifetime gifts puts capital permanently out of reach. Even when a client is shown, with the help of cash flow modelling, that they can comfortably afford to make gifts from their estate, it’s natural for clients to feel uncertain. How long will I live? What if my needs change? Will the cost of living increase further? Will I need to pay for care fees?

These are perceived barriers to estate planning Octopus has been helping advisers overcome for years. But they are particularly relevant in the current environment.