Investing
IHT is on the rise – estate planning is more important than ever
Global Banking & Finance Review®
Company
By Jack Rose, Head of Retail Sales at Triple Point
Jack Rose, Head of Retail Sales at Triple Point
With inheritance tax rising and house price rises refusing to slow, the need for effective estate planning solutions has never been more pressing. In fact, households are expected to pay £37 billion in inheritance tax over the next five years. As a result, more and more clients will be seeking IHT relief. Business relief (BR) can provide a solution, however, with the UK facing an economically turbulent and uncertain near-term future, diversification will be an especially important strategy to help protect the long-term health of clients’ financial assets.
IHT is on the rise
Inheritance tax receipts have been steadily growing, with HMRC’s latest data revealing a rise from £5.3 billion in 2020/21 to £6.1 billion in 2021/22. House prices are now rising at their fastest rate in 40 years and inflation hit an eye watering 9.1% this June, both of which are contributing to such a growth in IHT bills, with the nil-rate band set to remain frozen until 2026. In fact, recent research from PwC suggests that the £325,000 nil-rate band allowance should really have risen to £478,078 to match inflation. Equally, the Office for Budget Responsibility predicts that as much as £2.5 billion of inheritance tax receipts over the next five years will be solely due to inflation.
At the same time, as rising house prices have been adding to the growth of IHT receipts, with the residence nil-rate band remaining fixed for another four years, June saw house prices rise for the fifth month in a row and some commentators are suggesting prices will be 8% higher than in 2021 by the end of the year. More and more households have now crossed the threshold for IHT.
As an increasing number of clients seek to mitigate rising IHT, this offers a key opportunity for advisers. With nearly half of advisers concerned about Baby Boomer wealth transfer damaging their businesses, it is vital advisers are engaging with the next generation of clients. Supporting clients with estate planning can offer advisers the chance to engage with clients’ beneficiaries. In this sense, rising IHT offers advisers the opportunity to begin engaging with the future generation of clients and ensure they are prepared for wealth transfer.
Seeking solutions
Considering the rise in inheritance tax, it is more important than ever to adopt effective estate planning solutions. BR-qualifying investments can offer clients quick IHT relief but, crucially, without loss of control over their capital. Providing qualifying assets have been held for a minimum of two years at the time of passing, they can be passed on 100% free from inheritance tax.
As BR involves making an investment, clients also have the opportunity to target capital growth. 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. However, as with all investments, there are risks and with households currently facing significant financial pressures, and so adopting a strategy to mitigate as risk as possible should be a priority.
Diversification is key
Households are facing growing economic challenges not seen in decades, with reports suggesting that savings accounts are lagging so far behind inflation that their value could halve in real terms over the next 14 years. As a result, more clients will be seeking to mitigate IHT with BR-qualifying investments. Diversification can ensure the long-term health of client’s savings is protected as they develop a BR portfolio, an especially important strategy in light of current economic turbulence. Diversification is a well-established tool for building a balanced investment portfolio, with a range of investments spread across asset types and sectors which can reduce overall risk and limit exposure to any single asset.
Approaching a BR portfolio as you would a traditional investment strategy, prioritising diversification, is essential. In light of this, Triple Point has developed a sector tool to enable investors and advisors to establish the levels of sector diversification offered by unlisted BR providers. This can be instrumental in helping clients build a BR portfolio which is spread across different sector and asset types.
For example, where BR unlisted providers have traditionally focused on the renewables and infrastructure sectors, Triple Point is the only provider to offer leasing as a BR qualifying investment. Selecting providers which focus on different sectors is essential to building a diverse portfolio.
Providers that offer BR through leasing and lending companies, are also able to provide investors with reliable returns which are uncorrelated to equity markets. Managing a diverse debt financing book with c£750 million of AUM, Triple Point targets predictable returns by investing in a portfolio of lease and loan contracts which support a diverse range of businesses. Providers offering BR through leasing and lending companies are also able to help address the increasing demands to support SMEs and the public sector. For example, having provided £285 million of financing to UK-based businesses by March 2021, Triple Point has been able to support smaller businesses which were impacted by the pandemic.
As inflation and price rises continue, households will increasingly be seeking inheritance tax relief. Equally, with house price growth refusing to slow, despite claims the market is cooling, and the residence nil-band rate remaining fixed, more clients will find themselves crossing the IHT threshold. As a result, estate planning solutions have never been more curial. However, with current economic instability seemingly set to continue, an estate planning solution which also prioritises the protection of clients’ savings is vital. A BR portfolio which utilises diversification can be a key tool in supporting clients through rising IHT bills.
[1]https://www.ftadviser.com/Partner-Contents169/2022/06/14/Octopus-6-The-families-being-impacted-by-inheritance-tax
[2] https://www.ftadviser.com/investments/2022/06/06/several-ways-to-plan-for-iht/
[3] https://www.bbc.co.uk/news/business-61891649
[4]https://www.ftadviser.com/Partner-Contents169/2022/06/14/Octopus-6-The-families-being-impacted-by-inheritance-tax
[5]https://www.ftadviser.com/Partner-Contents169/2022/06/14/Octopus-6-The-families-being-impacted-by-inheritance-tax
[6]https://www.theguardian.com/business/2022/jun/20/house-prices-in-great-britain-hit-record-high-but-falls-predicted-in-2022
[7]https://www.professionaladviser.com/sponsored/4052367/schroders-engage-wealth-transfer-worries-advisers%E2%80%99-concerns
[8] https://www.ft.com/content/cf04b419-dc1c-4752-aa71-2dd2857d549b
Inheritance tax is a tax paid on the estate of someone who has died. It is calculated based on the value of the estate and is payable if the estate exceeds a certain threshold.
Estate planning is the process of arranging for the management and disposal of a person's estate during their life and after death, ensuring that their wishes are fulfilled.
Business relief allows certain business assets to be passed on free from inheritance tax, provided they have been owned for a minimum period before death.
Diversification is an investment strategy that involves spreading investments across various assets to reduce risk and improve potential returns.
A nil-rate band is the threshold below which inheritance tax is not charged. In the UK, this amount is currently set at £325,000.
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