With the last 12 months seeing the biggest increase in tax receipts since the turn of the century, it is evident that households are increasingly facing rising bills on several fronts, writes Triple Point retail sales head Jack Rose.
But with the Treasury predicted to raise £6.7bn ($8bn, €7.9bn) from inheritance tax (IHT) – a significant increase from £6bn last year and £3.1bn a decade ago – it is clear that IHT relief will be the top priority.
Equally, with inflation reaching a 40-year high and the UK facing an uncertain economic outlook, more and more clients will be seeking effective estate planning solutions.
As they do so, diversification will be an increasingly significant tool to advocate for within IHT relief to ensure clients’ savings are protected.
With families across the UK expected to pay £37bn in inheritance tax over the next five years, IHT receipts are clearly on the rise. Following inflation reaching 9.1% in June, this prediction accounts for an extra £2.5bn in receipts solely due to rising inflation.
With the nil-rate band having remained frozen for more than a decade at £325,000, estimates suggest that its failure to increase in line with inflation has cost households a further £153,078, which could have been passed on tax-free.
At the same time, the pandemic has triggered an exponential rise in house prices, with almost 690,000 residential properties in Britain now worth over £1m. With house prices continuing to rise to record highs for the fifth month in a row this June, it is clear that this house price growth is refusing to slow, in spite of suggestions of a cooling market. However, the residence nil rate-band also remains fixed at 175,000 until 2026.
As a result, rising house prices are causing more and more clients to cross the IHT threshold and face significant bills. With this rise in inheritance tax receipts looking set to continue, IHT relief will be a top priority for an increasing number of clients.
This offers a key opportunity for advisers. Baby Boomer wealth transfer is a key concern for the majority of advisers with 49% worried their business could lose assets as money passes to partners and younger generations.
In fact, 60% of wealth in the UK is expected to be in the hands of women by 2025, largely driven by the baby boomer generations passing wealth between partners, yet only 11% of advisers have a strategy for retaining and advertising to female clients. IHT relief enables advisers to engage with the beneficiaries of clients, offering a key opportunity for advisers to retain assets and engage a future client.
Estate planning solutions
Business relief (BR) can provide a key solution. Provided qualifying assets have been held for a minimum of two years at the time of death, BR-qualifying investments can be passed on free from inheritance tax. This offers clients quick IHT relief without loss of control over the investment.
There are a range of BR-qualifying assets available for clients to choose from. BR is available through shares in an unquoted qualifying company; shares in a qualifying company listed on the Alternative Investment Market; and an unincorporated qualifying trading business, or an interest in one.
Utilising BR as an IHT relief tool involves making an investment. This provides clients with the opportunity to target capital growth but, as with all investments, also carries an inherent risk. In light of the economic pressures households across the UK are currently facing, adopting an estate planning strategy which seeks to mitigate this risk as far as is possible is key.
Targeting reliable returns
Diversification can be a key tool for advisers to advocate for in order to protect the long-term health of clients’ savings. With inflation expected to reach 11% this autumn and households across the UK facing a cost-of-living crisis, clients will be increasingly seeking IHT relief. Diversification can ensure clients adopt an estate planning solution which mitigates risk and targets reliable returns.
Within BR, it is vital to adopt the same approach as you would to any traditional investment strategy – namely, ensuring that diversification is a key consideration. In particular, building a balanced portfolio with investment spread across asset types and sectors is essential.
In light of this, Triple Point’s sector tool shows clients and advisers how a portfolio can look when funds are spread across a variety of providers in the unquoted BR space. This can be instrumental to helping clients build a portfolio which is truly prioritising sector diversification.
For example, many BR unlisted providers tend to focus on the renewables and infrastructure sector. However, Triple Point is the only provider to offer leasing as a BR qualifying investment making it a natural complement to other providers. Equally providers offering BR through lending and leasing, such as Triple Point, are able to offer clients reliable returns which are uncorrelated to equity markets.
With the economic outlook remaining uncertain as the UK undergoes a transition of power to a new prime minister, mitigating risk when it comes to IHT relief will be a top priority for clients. As a result, a BR portfolio which prioritises diversification can be an essential estate planning tool as clients continue to face climbing IHT receipts.
This article was written for International Adviser by Jack Rose, head of retail sales at Triple Point.