For professional advisers and paraplanners only. Not to be relied upon by retail investors.
Soaring inflation combined with frozen tax allowances is having a significant impact on inheritance tax (IHT).
Let’s run through some headline facts and figures.
The nil-rate band has been frozen for more than a decade at £325,000. The residence nil-rate band is staying put at £175,000. Other allowances haven’t been adjusted for inflation for more than 40 years. The annual gifts exemption of £3,000, for example, would be £12,950 were it adjusted.
Meanwhile, inflation is set to reach a 40-year high  The value of estates is skyrocketing, with one in 42 homes now worth more than £1 million. Clients already affected by IHT can expect to have a bigger liability to plan for. And many families who might think that IHT doesn’t affect people like them will be dragged into the net.
All told, UK families are set to pay £37 billion in inheritance tax over the next five years alone.
This is a huge opportunity for financial advisers to add value. But you will need to consider how uncertainty and the cost-of-living crisis might impact your approach to estate planning.
The cost-of-living crisis and estate planning
While some start thinking about IHT as early as their fifties or sixties, the reality is that it’s common for people to think about their estate much later in life.
When a client is in their eighties or nineties, it’s less likely a lifetime gift will work as intended, because they need to survive the seven-year taper. That can lead some clients to believe they’ve left it too late to plan their estate.
This is a legitimate concern.
The simple answer would be to put planning in place sooner. But the younger a client is, the stronger their concerns are likely to be about access and control of their wealth.
Now add to that an inflationary environment where some clients will have intense anxieties about how much money they’ll need to access in later life. It’s extremely common for clients to overestimate how much they’ll need to live on in retirement. It’s no different when it comes to IHT planning.
Making lifetime gifts puts capital permanently out of reach. Even when a client is shown, with the help of cash flow modelling, that they can comfortably afford to make gifts from their estate, it’s natural for clients to feel uncertain. How long will I live? What if my needs change? Will the cost of living further increase? Will I need to pay for care fees?
These are client objections to estate planning Octopus has been helping advisers overcome for years. But they are especially relevant in the current environment.
The benefits of Business Relief
Investments that qualify for Business Relief (BR) can help unlock client conversations. Even if the client ends up going down a different route.
That’s because BR offers two significant advantages. Speed and access.
Once a BR-qualifying investment is held for two years it becomes zero-rated for IHT. The client must also hold the investment until death, at which time it should pass on free from IHT.
In return for making a higher risk investment, clients can benefit from a two-year clock – that’s significantly shorter than the seven years that are typical for gifts to become fully exempt.
Because the client is making an investment, it also means they can request access to their capital at any time. This is, of course, subject to liquidity being available.
Feel confident recommending BR
BR is more than 40 years old and has stood the test of time. It’s been supported by all governments in place during that time and, although changes have been made to it, they have all been to broaden its scope and make it more generous, rather than to limit its use.
BR-qualifying investments are made in unlisted and AIM-listed trading businesses, operating in a wide range of sectors. These companies help build a better future acting as a hub for productivity and employment, not just through jobs they create themselves but through the industry that can build up around them.
As they are unlisted or AIM-listed trading companies, this brings inherent risks for investors. So the tax relief is available to compensate for some of that risk.
Bear in mind the risks
When it comes to BR-qualifying investments, you should remember that the value of an investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest.
Tax treatment depends on individual circumstances and tax rules could change the in the future. Tax relief depends on portfolio companies maintaining their qualifying status. The shares of smaller and unquoted companies could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell.
Come to your local Octopus Live 2022
Our popular estate planning seminars are back on the road!
We’ll be running 21 events across the UK this summer, where you can find out more about estate planning in 2022. As well as refreshing your knowledge of IHT, we’ll help you identify clients who could benefit from a conversation about inheritance tax, and we’ll cover key inheritance tax planning strategies, including the use of Business Relief.
Join us at Octopus Live: Estate planning roadshow
From 6th – 24th June 2022. Find your nearest seminar.