The families being impacted by inheritance tax

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. 

The benefits of Business Relief

Investments that qualify for Business Relief (BR) can help unlock client conversations. Even if the client ends up going down a different route.

That’s because BR offers three significant advantages. Speed, growth, and access.

BR-qualifying investments are made in unlisted and AIM-listed trading businesses. Investing in these types of companies brings inherent risks for investors, so tax relief is available to compensate for some of that risk.

Once a BR-qualifying investment is held for two years it becomes zero-rated for IHT. The client must also hold the investment until death, at which time it should pass on free from IHT.

Because the client is making an investment, it means clients have an opportunity to target growth as part of their estate planning. It also means they can request access to their capital at any time. This is, of course, subject to liquidity being available.

Options available for clients with different objectives

There is a range of BR-qualifying investments out there in the market for clients to choose from, depending on their objectives.

This is particularly relevant for clients who could benefit from starting their estate planning earlier in life, where they may wish to target more significant growth from a portfolio of BR-qualifying shares listed on the Alternative Investment Market (AIM).

It’s also worth bearing in mind from a diversification point of view if you are revisiting estate planning for clients who already have plans in place but now face greater exposure to inheritance tax.

Bear in mind the risks

When it comes to BR-qualifying investments, you should remember that the value of an investment, and any income from it, can fall as well as rise. 

Tax treatment depends on individual circumstances and tax rules could change the in the future. Tax relief depends on portfolio companies maintaining their qualifying status. The shares of smaller and unquoted companies could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell.

Jessica Franks, Head of Retail Investment Products, Octopus Investments

Learn more at Octopus Live Online 2022

Want to learn more about the estate planning landscape, the advice opportunity, and how you can support clients?

Sign up to Octopus Live Online 2022, a CPD-qualifying estate planning webinar on Wednesday 13th July at 10am.

As well as refreshing your knowledge of IHT, we’ll help you identify clients who could benefit from a conversation about inheritance tax, and we’ll cover key inheritance tax planning strategies, including the use of Business Relief.

It’s easy to register now. Just go to octopusinvestments.com/octopuslivewebinar

For professional advisers and paraplanners only. Not to be relied upon by retail investors