Tony Sime, Sales Director at Downing, takes a closer look at an increasingly important yet frequently overlooked aspect of wealth management.
1. A growing number of people are falling subject to IHT unexpectedly
The amount of inheritance tax (IHT) receipts, that’s the amount paid to the government in inheritance tax, continues to climb year-on-year, hitting £5.4 billion during the 2018/19 tax year. And in March 2019, IHT receipts jumped by a remarkable 44.4%, compared to the previous month.
There are several ostensible reasons for these sharp increases but the one that may surprise you the most in today’s modern world, is that some parents still aren’t talking to their adult offspring about their family wealth.
I regularly come across scenarios where sons and daughters aren’t discovering the extent of their parent’s wealth until fairly late in their lives. It seems that the very British – and well intentioned – tradition of keeping your financial affairs extremely private still stands. But this can lead to all kinds of issues for sons/daughters who may only discover this when it’s too late and they are faced with a large IHT bill upon their parents’ death. Even if they find out before then, either or both the parents and their offspring may still have a big job on their hands to help mitigate IHT, particularly if the parent in question is in poor mental or physical health.
2. Keep an eye on the value of property & other assets
In April 2017, a new residence nil rate band (RNRB) was introduced in addition to an individual’s own nil rate band of £325,000, which initially led many to think that fewer people would be liable to IHT.
How the RNRB works Having been set initially at £100,000 per person in 2017, the RNRB has increased by £25,000 each year and will eventually be capped at £175,000 in 2020/21.Thereafter, it will increase in line with the Consumer Price Index (CPI). This means that by 2020/21, families can protect up to £1 million of their wealth from IHT, provided certain conditions are satisfied.
An important note – the RNRB only applies when someone is passing on their main residence to direct descendants such as children or grandchildren.
So far, so good? Not necessarily, because the price of assets, whether it’s property or investment portfolios, have largely continued to grow in value too, which has pushed many unsuspecting people over this £1 million threshold. People living in areas that have experienced significant house price rises in recent years should be careful.
However, if a client is fortunate enough to have an estate worth more than £2 million the RNRB will be subject to a taper; for every £2 above £2 million, the RNRB will be reduced by £1. This means that joint estates worth £2.7 million and over will not benefit from the RNRB.
3. Different rules may apply
Different sets of rules for IHT may apply to your clients and their loved ones. The standard 40% rate on anything above the £325,000 threshold will automatically apply for people who are single or unmarried. Making a will is particularly important for anyone in this position, as a way of ensuring that their estate is passed on in line with their wishes and help guarantee that their beneficiaries don’t pay more IHT than they need to.
By contrast, if one partner in a married couple or civil partnership passes away, their entire estate can be transferred to their spouse without being liable for IHT. The unused balanced on their nil-rate band is also passed on to their spouse.
4. Don’t put off planning
Talking about plans for passing your client’s money on, whether it’s with their partner, family or you, their financial adviser, doesn’t always feel like the easiest conversation to have. And some of the big questions – ‘What if I need my money back? What if I gift my money and my daughter and son-in-law divorce? What if I change my mind?’ – can make some people particularly hesitant to make decisions about if and how to pass on their estate. But delaying plans could lose them vital time, particularly as some forms of IHT relief can take years to kick in.
Gifting some of their assets to a loved one or putting them into a trust – two of the most traditional ways to mitigate IHT – can take up to seven years to qualify for the tax relief. Business Relief investments, often available through estate planning services, become exempt from IHT after two years.
It’s crucial for your clients to consider all of these options against their personal circumstances before deciding which route to take and it is also possible to blend these different strategies, to help meet the needs of your clients and their loved ones while also spreading risk across different investments.