Protection will play important role in estate planning

Baby boomers, having profited from the UK’s property boom, are now the nation’s wealthiest generation, and will pass record sums of wealth onto their younger relatives.

While many may be likely to cash in their property or assets to fund retirement or later life care, it is still expected that the UK’s younger generations will inherit trillions from their older relatives. Indeed millennials struggling with unaffordable property, rising inflation and stagnant wage growth may be hoping that this inheritance further down the line will help fund their future finances.

However, the future inheritance windfall millennials are set to receive is a double edged sword: with record levels of inheritance comes record levels of inheritance tax (IHT).

In 2017, HMRC took a record sum of £5.3bn from estates and this figure is only set to rise in the coming years, with the number of people who pay the tax set to double to 10 per cent by 2019.

The IHT framework at present is deemed by consumers, advisers and even government to be far too complicated.

IHT has the honour of being one of the UK’s most begrudged taxes. Many UK adults consider it unjust that hard earned money, taxed while living, should face additional taxation when it is passed onto their children or relatives.

That said, popularity issues are not the only challenge facing IHT. The IHT framework at present is deemed by consumers, advisers and even government to be far too complicated.

Loopholes, legacy clauses and general confusion has led the Chancellor Philip Hammond to brand the system “particularly complex”, requesting the Office of Tax Simplification (OTS) to launch a review into IHT, with the objective of simplifying the current system.

While pensions are generally IHT-free the rules regarding inheritance remain complex, depending upon who these assets are passed onto and at what age the saver dies.

Property, on the other hand, is subject to IHT and while it benefits to some degree from the residence nil-rate band, receipt of this tax relief is contingent on a number of factors such as who inherits the property and its value.

With pensions and property accounting for the bulk of the UK’s wealth, simplification and clarity around these rules is needed.

Rules surrounding IHT are also somewhat outdated, particularly when it comes to the rights of cohabitees. Couples choosing to live together unmarried fail to benefit from any of the legal rights or privileges afforded to married couples when a partner dies, meaning cohabitees are often financially exposed during what is already a very difficult time.

Is gifting the solution?

With many people reluctant to see their relatives taxed at up to 40 per cent of the estate they leave behind, older generations are turning to savvy and tax-efficient measures, such as gifting, to pass on large swathes of their estate. With the amount of wealth liable to IHT set to increase in the coming years, gifting could become an increasingly popular method of estate planning, yet due to the lack of clarity as to how much UK adults can be given tax free, many underestimate how much they can gift to friends or families.

Gifting is also arguably a riskier form of estate planning. A recent study from wealth manager Brewin Dolphin found that a third (32 per cent) of UK adults admit they’re unaware of the maximum amount of money they can gift to their loved ones without incurring IHT, while alive.

What clarity can advisers provide?

Safeguarding estates from tax is incredibly complicated and often near impossible for people to understand without the expert advice of a wealth or financial adviser.

While we await the publication of the OTS’ review and potential reforms, financial and wealth advisers can help offer their clients some certainty and ensure they are aware of the holistic set of options available to them.

For example, protection products such as whole of life insurance remain relatively unknown to everyday UK adults, yet can be an incredibly efficient and effective means of protecting wealth and estates.

When having conversations with clients, wealth and financial advisers should consider these products in order to help offer greater support to clients’ when it comes to planning their estates.

In the coming years we are set to witness the greatest intergenerational transfer of wealth the UK has ever experienced. IHT, once a tax faced only by the wealthy few, is set to become a reality for many more people in the UK.

Those firms who can ensure their clients can manage their estates with peace of mind, while providing added certainty to their loved ones, will be well placed to capitalise on the changes at play.

Mark Cracknell is head of protection distribution at Aviva