Chancellor Jeremy Hunt is expected to tighten the tax screws on Britons in the Autumn Statement on Thursday (November 17) and clients will need help - but advisers have said the one tax they should not have to help with is inheritance tax.
According to Joshua Gerstler, chartered financial planner at Borehamwood-based The Orchard Practice, the government has failed repeatedly to improve IHT, which has been referred to as both a stealth tax and a voluntary tax.
Therefore he said it was up to the government to reform IHT and raise the threshold from £325,000 - the level at which it has remained since April 6 2009.
Gerstler said: "It used to be that only the super rich needed to pay IHT and now we are seeing more and more middle class families being dragged into it.
"It is unfair on those who work hard and pay every other tax all their lives, to then be penalised again just for wanting to pass something onto their children.
Some people see IHT as the only voluntary tax. Just ask King Charles. Samuel Mather-Holgate, Mather & Murray Financial"There are things financial planners can do to mitigate this tax; however the point is that we should not have to."
However given indications the government will continue with the freeze on IHT thresholds, advisers have remarked on the unfairness of persisting with a tax that once used to be the purview of the wealthy and now traps millions more.
Samuel Mather-Holgate of Swindon-based advisory firm, Mather & Murray Financial, agreed that IHT was an "absurd" stealth tax.
He said: "The fact you have to pay up to 40 per cent of your wealth to the state, simply because you had the cheek to die, is absurd.
"By freezing rates when inflation is so high, the chancellor will trap many hundreds of thousands of extra people into paying this tax in quite a stealthy way.
"With transferable bands between spouses and residential property reliefs, most married couples will have a total threshold of £1mn.
"However, house prices have increased massively since Covid and other assets have also ballooned with low interest rates, so the Treasury will have a bumper two years with this potential freeze."
He added: "Seeing an independent financial adviser who specialises in this area can save your beneficiaries thousands. We’ve had clients who have saved millions by planning early. That is why some people see IHT as the only voluntary tax.
"Just ask King Charles."
If the nil-rate band and the residence nil-rate band were to rise with inflation, Britons would see the following increase:
Nil-rate band:
Current NRB - £325,000
2026/27 NRB - £338,000
2027/28 NRB - £351,520
Residence nil-rate band:
Current RNRB - £175,000
2026/27 RNRB - £182,000
2027/28 RNRB - £189,280
Shaun Moore, chartered financial planner at Quilter, said the government was stuck between a rock and a hard place at the moment as it deals with the significant debt it took on to cope with the pandemic as well as needing to alleviate a cost-of-living crisis.
Nevertheless, he said extending the frozen thresholds for an additional two years would be "an inheritance tax raid by stealth".
Moore added: “It is also worth remembering that the gifting allowances have also not increased with inflation so it reduces people’s options for mitigating IHT.
"If the government does choose to freeze IHT thresholds they should at least increase the gifting allowances, particularly in light of the cost of living crisis as this could help the flow of intergenerational wealth and take the sting out of the financial hardship many will be facing.”
What to do
Alex Shairp, founder at Glasgow-based Blackmount Private Wealth, said despite the government's inevitable tax raid, this "controversial" tax can be mitigated through various means.
Shairp outlines these methods as:
- Making gifts to your intended beneficiaries before the inevitable happens is an option, although this takes a lot of forward planning and several years to be effective.
- If the clock is ticking, investing in companies that qualify for business relief can reduce the amount of IHT due on an estate. These types of investment are risky, though, and won't be suitable for everyone.
- Using trusts is also a good way to avoid IHT. Again, this can be a complex area and won't be appropriate in all circumstances.
- Saving into a personal pension, which is legally a trust, allows you to have a lot of control over your money while keeping it out of your taxable estate and making it potentially available to the next generations.
- Donating a proportion of your estate to charity can also reduce the rate of IHT from 40 per cent down to 36 per cent, which is significant.
To add to this list, Colin Bates, financial planner at Chapter 3 Financial Planning, said: "Spend all your money while you are alive and live the fullest life you can imagine."
simoney.kyriakou@ft.com
FTAdviser will be bringing you all the live updates on the Autumn Statement. Stay tuned on Thursday (November 17) for the live updates and expert commentary as it happens.
