Inheritance Tax  

How to carry out inter-generational planning

  • To ascertain what is important about IHT planning.
  • To understand how different investment types can help with IHT planning.
  • To learn what sort of investment strategies could help clients.

Overall, the average cost of a house has increased 34 per cent since 2009. There is also the value of other assets individuals may own.

Take the FTSE 100, which opened in 2009 at 4,434 and at the time of writing is at 7,414, an increase of more than 67 per cent.

Individuals with even a relatively small portfolio of stock market investments may not realise that, combined with their other assets, they are above the IHT threshold.

The true impact of this asset boom is very clear when we look at property prices across the country. In some postcodes in London, as many as 93 per cent of properties are over the IHT threshold; even at the lower end it is still more than 63 per cent.

Looking at the UK as a whole, 28 per cent of postcode areas have seen the number of property sales exceeding the IHT threshold double in the past six years.

These include: Brighton, Bromley, Bristol, Cambridge, Colchester, Croydon, Durham, Northampton, Norwich, Portsmouth, Stevenage, Tweed, Uxbridge, and Watford. 

For consumers, this is a major area of education. There is a lot of misunderstanding among even informed consumers about what an individual's IHT allowance is.

Many people believe that a couple's joint allowance is £1m. In fact, it will only reach that in 2020. Many do not realise that these allowances are dependent on owning or having owned a property, so if the majority of wealth is in other assets, such as stocks and shares, individuals may be liable for more than they think.

There is also a lack of understanding that these allowances can only be transferred to a spouse or partner, and that they only apply if the estate is inherited by a direct descendant.

This crucially means those who would like to leave their estate to people other than their children, will lose out on any IHT property relief.

Tapered property allowance.

In addition some people may not realise that the property allowance is also tapered for estates worth more than £2m - reducing a couples IHT free £1m by £1 for every £2 over the threshold. 

Managing this complex market needs much more education and new solutions to help advisers and their clients.

It is clear that many people are in the dark about this potential IHT crisis. While more than a third of over-55s are concerned about IHT, only one in five has actually sought financial advice to help them reduce their potential tax bill.

To solve this there is a need for more financial education, and IFAs can play an important role in this. However, financial advisers will need to do more to reach all generations, rather than simply focussing on the older age groups.