Assets exempt from inheritance tax will likely rise in popularity over the next year as more households move past the frozen tax threshold.
In March 2021, prime minister Rishi Sunak - then chancellor - froze the nil rate band at £325,000 until April 2026.
Then last month in his Autumn Statement, current chancellor Jeremy Hunt extended the freeze by a further two years, to 2028.
Any estate which exceeds the £325,000 threshold is charged 40 per cent in IHT.
The further freeze is expected to push up IHT receipts from £6.1bn in 2021/22 to £7.8bn in tax year 2027/28 - an increase of 28 per cent or £1.7bn, according to Office of Budget Responsibility figures.
If the nil rate band had risen in line with inflation, today it would be worth £407,000 and projected forward to tax year 2027/28 it would be over £500,000.
"With social care cost cap provisions being delayed further and personal expenditure rising, clients will be wary about gifting too much too soon," said Nick Ritchie, senior director of wealth planning at RBC Wealth Management.
"At the same time, a freeze in inheritance tax thresholds leaves those with even modest estates, exposed to significant death duties.
"Parents trying to walk the tightrope of gifting to reduce inheritance tax exposure, without sacrificing their own standard of living, might look to strategies that achieve this without giving it all away. We expect insuring the liability and investing in assets that are exempt from IHT to be popular in the coming years."
Preparing finances for a higher tax regime
The Autumn Statement, Ritchie said, revealed the latest incarnation of the Conservative party is keen to raise revenues by capturing “more from those who have more”.
With an election inevitable by 2024, the director reckons the prospect of the Labour alternative will lead many to consider how best they are protecting their wealth from the higher tax regime.
"Aside from leaving the UK altogether, using tried and tested allowances from Isas to pensions to investment bonds and looking at tax reducers such as EIS [Enterprise Investment Scheme] and VCT [Venture Capital Trust] investments will gain increasing attention from those who remain," Ritchie explained.
And with rising costs, higher interest rates and a greater fiscal drag on earnings, he predicts more strain on the bank of mum and dad.
"We expect children of high-net-worth individuals to require more support and parents to oblige with smaller, more frequent and targeted gifts," said Ritchie.
"Perhaps helping with grandchildren’s school fees, funding the cost of home improvements or even helping with the spiraling cost of heating one’s home."
The turbulent market conditions also presents an opportunity for active managers able to seek out more esoteric opportunities for clients' portfolios, Ritchie predicted, adding that a return to active management and alternative investment strategies looks likely.
"Alternative strategies such as structured products with some form of capital protection may tempt investors who seek upside on cash without full market risk," he said.