Inheritance Tax  

How to manage IHT amid cost of living crisis

  • Identify steps clients can take to mitigate IHT
  • Understand which tax reliefs can help to mitigate IHT
  • Understand the importance of holistic planning
How to manage IHT amid cost of living crisis

When the chimes of Big Ben rang in the New Year, I doubt any of us expected 2022 to turn out quite the way it has.

Three prime ministers, two heads of state, a war in Ukraine, combined with the impacts of Brexit and a global pandemic, have wreaked havoc with so many aspects of the UK's and the wider global economy, culminating in the cost of living crisis we are currently experiencing.

Expert financial planning has probably never been more challenging, nor more important, than it is right now.

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All indicators show that we are heading for a recession: the question many of us are asking is for how long, and how much of a contraction will we see? 

It might therefore not come as a surprise to learn that when we asked a group of financial advisers to prioritise their clients’ needs for the next 12 months, 78 per cent stated that helping individuals to manage their finances through the crisis was number one on the list.

This was followed by wealth preservation and hedging inflation (65 per cent) and reviewing investment portfolios (64 per cent). 

Estate planning and mitigating inheritance tax (IHT) remains on clients’ list of concerns, with 25 per cent of advisers thinking it will be more of a priority in the next 12 months.

Moreover, our analysis revealed that more than half of advisers (57 per cent) think the wider economic uncertainty makes gifting as a tool for mitigating IHT a less appealing option, since clients might want to retain access to their money.

The question then is what other options are available to mitigate IHT?

IHT – a growing issue, but traditional solutions are challenging in this environment

Latest figures from HMRC show that receipts for IHT for April 2022 to September 2022 were £3.5bn – £0.4bn higher than the same period a year earlier. 

The current threshold of £325,000 for a single person (with an additional transferable main residence nil rate band of £175,000 available when passing the family home down to children or other direct descendants) has been in place since 2009.

Given the chancellor’s current budgetary predicaments, it is possible that these thresholds will remain in place for some time to come, affecting more and more individuals.

Indeed, the Office for Budget Responsibility has forecast that by 2026 close to 50,000 estates will be caught by the IHT thresholds, and total receipts will have increased to £7.8bn. 

Individuals want to leave as much money as possible to their loved ones after all, and our research showed that about three quarters of advisers see gifting as the most popular estate planning strategy among their clients.  

Advisers have suggested that the main motivations for clients, when assessing IHT and estate planning strategies, are to ensure adequate support for loved ones (48 per cent) and to provide a straightforward tax planning solution (47 per cent).