Well over half (58%) of investors aged over 50 who use an Independent Financial Adviser have not asked them for Inheritance Tax (IHT) advice according to new research amongst UK advisers conducted by TIME Investments, a leading specialist in estate planning solutions. This is despite the fact that receipts from IHT in the UK are set to increase from the record £5.4 billion in 2018/19, to £6.9 billion in 2023/24 – an increase of £1.5 billion over the next five years – according to Government forecasts.
The survey showed that, according to advisers, there are several barriers to investors seeking advice around their IHT planning. Over half (57%) cited poor understanding due to the complexity of IHT. Uncertainty over how much money is required to provide for the rest of their life (46%) was also a concern for many. A reluctance to discuss death (44%), the perceived cost of advice (31%) and negative perceptions around some tax planning vehicles (28%) were also stated as reasons to avoid planning
Commenting on the findings, Henny Dovland, TIME Investments’ IHT expert said: “Estate planning and wealth transfer should be seen as a positive step in helping younger generations, rather than something that is difficult to talk about. Our research shows there is a real opportunity for advisers to educate and inform their clients about the benefits of effective tax planning.”
Bharat Chudasama from Tudor Franklin said: “IHT planning is a notoriously complex area and one where quality advice and appropriate investment solutions can make a real difference. We encourage all of our clients to think about wealth transfer sooner rather than later as part of their savings and investments planning.”
Henny sets out the following areas to think about when considering intergenerational financial planning:
- Think about how much income is required in retirement and how long this income needs to last.
- Where there are surplus assets, IHT planning should be considered. There are several tax efficient ways to pass assets to descendants, but these have different constraints and obligations.
- The easiest route may be to pass cash to family members. However, aside from the use of small and annual gift allowances, larger gifts will typically take seven years to fully fall outside of the taxable estate. It also means those doing the giving lose total control of the money.
- A more complex option, but with greater constraints on the recipients, is to set up a trust which is exempt from IHT. However, as with gifting, once the assets are in the trust the individual loses control.
- An alternative tax efficient option is investing in shares that qualify for Business Relief (BR) which can offer 100% IHT relief in just two years.
- The nil rate band has been stuck at £325,000 for over 10 years, meaning anyone with an estate exceeding that figure could be liable for IHT. Clearly this is an issue given the upward trend in house prices. In response, the Government introduced the Residence Nil Rate Band (RNRB) which now allows homeowners an additional £150,000 before they are subject to IHT. From April 2020 it will be at the full rate of £175,000 per person.
- Only direct descendants qualify for RNRB. Married couples leaving their assets to each other may transfer the RNRB to the surviving spouse allowing them to use up to twice the tax-free amounts available to a single individual.
Pensions and ISAs
- Flexible pensions are another tax efficient way of passing money down through the generations. If the pension scheme member dies before age 75, their nominated beneficiaries will not have to pay any tax on withdrawals, whether as an income or lump sum. If the pension member dies after age 75, pension assets become taxable at the marginal rate of income tax of the recipient.
- ISA holdings still form part of the taxable estate for IHT purposes. A surviving spouse or civil partner can inherit ISA funds from their deceased partner or make an additional ISA subscription up to the value of their deceased partner’s ISA holdings. It is possible to invest ISA funds in AIM listed companies that can qualify for 100% BR relief after two years of ownership.
Top tips for effective intergenerational financial planning
- Start intergenerational planning early to avoid time restrictions
- Consider the wider family and younger generations
- Understand financial planning strategies that can benefit several generations simultaneously
- Think about including Business Relief as part of IHT planning
- Use the RNRB to full effect
- Revisit trusts to assess their effectiveness for today’s families
- Use pensions as an efficient means of protecting the legacy
- Ensure clients do not pass on too much too soon and lose control or become dependent
- Review everyone’s circumstances regularly
Research conducted by PollRight among 55 UK-based professional financial advisers during August 2019.
Categories: Inheritance Tax, News, Press, TIME:Advance, TIME:AIM, TIME:CTC