One in three (31 per cent) clients are likely to be affected by the frozen inheritance tax thresholds, making up more than twice as many as will face a lifetime allowance charge, according to a survey of financial advisers from Octopus Investments.
In this year's Budget it was announced that both the pensions lifetime allowance and IHT thresholds would be frozen until April 2026.
But advisers believe frozen IHT will impact almost double the number of clients (17 per cent) than the frozen LTA.
While the majority of financial advisers (64 per cent) said affected clients are aware of the IHT freeze, only 11 per cent say their clients fully understood how the change could impact them.
A third (32 per cent) believed affected clients were still completely unaware of the changes.
When asked what changes their clients would need to make in light of the IHT freeze, financial advisers overwhelmingly (72 percent) said they’d need to increase lifetime gifting to avoid the 40 per cent tax.
This was followed by 37 per cent of advisers who anticipated increased use of investments qualifying for business property relief, which is particularly useful for those wanting to retain access to their money.
More than a third (36 per cent) of advisers also expected clients to use lifetime trusts.
Nick Bird, head of strategic growth at Octopus Investments, said: “The freeze to IHT thresholds, coupled with rising property prices, means more estates than ever are likely to face an IHT bill. The good news is there is plenty clients can do to make sure this is not the legacy they leave behind."
He said increased lifetime gifting was likely to be the biggest change made to financial planning following the IHT freeze announcement.
"Now that we’re all living longer, that balance between lifetime gifting and keeping enough to feel secure in our later years has become more difficult, and that’s why lots of advisers are also considering flexible planning solutions, such as BPR, as a more flexible tool to pass money through the generations.
“IHT is a complicated and often misunderstood tax and advisers have a real opportunity to add value to their clients, particularly where they might otherwise fail to recognise the need.”
LIfetime allowance
The research also showed that just one in six clients affected by the LTA freeze understood how it might impact them.
While the majority (67 per cent) of financial advisers whose clients will be affected said their clients were aware of it, they felt that only 16 per cent actually understood how it might impact them.
In response, half of financial advisers anticipated that affected clients would redirect contributions into their spouse’s pension to prevent an LTA charge.
A similar number (48 per cent) said they would advise clients to prioritise other long-term savings ahead of making new pension contributions, such as maximising their annual Isa allowance.
Changes advisers expect clients to make following the LTA freeze:
| Redirect contributions into spouse’s pension | 50% |
| Prioritisation of other long-term savings e.g. maximising annual ISA allowance | 48% |
| Reducing or stopping pension contributions | 46% |
| Withdrawing tax free cash to reduce the potential second LTA charge at age 75 | 45% |
| Choosing to crystalise funds earlier, to prevent pot reaching the LTA | 44% |
| Recommending lifetime allowance protection | 31% |
| Increased use of tax efficient investments as long-term compliment to pensions (e.g. VCTs / EIS) | 30% |
| Increased use of tax efficient investments to mitigate income tax (e.g. VCTs / EIS) | 25% |
| No change – clients would accept the tax charge on the excess | 7% |
Source: Octopus Investments
Advisers' perspective
Tom Kean, director at Thameside Financial Planning, said this was something most IFAs were faced with day to day. “It is absolutely normal for us to look further afield now, where once we looked to pensions and Isas as the mainstay of wealth planning,” he said.
“It’s so easy for even modestly well-off clients to imagine a scenario where they are impacted by LTA and IHT in equal measure. Personally I’d think the pensions are more prone given the longer term outlook for equities, but clearly property is an ever-present factor, and larger estates being impacted by the tapering over £2m.
“For me, the biggest margin is gifting, with us helping clients to be more confident doing it. But business relief will become ever more popular I am sure.”
Business relief is an aspect more people are talking about now. Last week (May 20) at the Paraplanner Conference, run by the Chartered Institute for Securities & Investment, Time Investments strategic partnerships manager Harry Donoghue also outlined different planning approaches when advising on inheritance tax and how business relief can tie in with that.
However, MFP Wealth Management chartered financial planner Justin King said the research seemed to be forgetting “unwrapped investments” such as £2000 dividend allowance and £12,300 capital gains tax.
He said: “It doesn’t escape IHT but does allow planning. Business relief if needed can be done two years before death; you can only get relief if the deceased owned the business or asset for at least 2 years before they died.”
Russell & Co Financial Advisers IFA Tim Morris said his views on these taxes had changed.
He explained that previously he felt strongly about the number of estates being “dragged into the realm of IHT” purely based on the price of properties in London and the South West.
“This seems to be penalising many people who saved hard to buy a home many years ago and have seen prices spiral due to the ever increasing pull of London,” he said. “
"That may sound great, yet many of those affected in future will have missed out on DB pensions and find they will have increasing pressures of paying for care in their old age. Many are relatively cash poor.”
However, he said his change of heart was an example of how things would change post-Covid.
“There’s been much talk of some kind of wealth tax and I can see the sense in this. We actually already have a wealth charge upon death. And now residential properties that are someone’s main home up to the value of £1m can be exempt, it penalises less of the ‘asset rich, yet cash poor’ home owners."
He added: “The good thing about IHT is that it is arguably a voluntary tax. With some careful planning and simply by making some lifetime gifts, you can reduce or even fully mitigate any liability. Even ensuring pension allowances for both spouses can help achieve this.”
sonia.rach@ft.com
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