In the first of a new series of articles on IHT planning, Christina Stone explains why this is one of the most essential topics advisers need to be discussing with their clients this year - and for years to come
Inheritance tax (IHT) was once a concern only for the rich and famous. Rising asset values and static thresholds are nowadays affecting more and more families, however, making this far from the case any longer.
In 2018/19 IHT receipts totalled a staggering £5.4bn, with the amount of IHT collected by HMRC having continuously increased since 2009/10. In particular, rising house prices in the UK mean more families than ever before are falling into the inheritance trap, underlining the importance of estate and succession planning.
Put it another way: rising estate values + an aging population = unprecedented wealth transfer levels. According to the Office for National Statistics, 18% of the UK population were aged 65 and older in 2016, and this proportion is expected to swell to 25% by 2045.
As such, the more shrewd and knowledgeable advisers are asking themselves if they are making the most of the potential estate planning opportunity - where an expected £5.5 trillion will pass between generations in the UK in the next 30 years, and families potentially stand to lose millions in assets as this intergenerational wealth transfer occurs without careful IHT planning assistance.
This ‘inheritance economy' is creating challenges for policymakers and families alike, and advisers are in the unique position of being able to help their clients navigate the complexities of IHT, maximising intergenerational wealth transfer and earning the trust of the next generation to inherit from their parents and grandparents.
The IHT basics
IHT is normally charged at 40% on an individual's directly-owned assets over the nil-rate band. This threshold currently stands at £325,000 for an individual, or £650,000 for a husband and wife or civil partners.
For the purpose of IHT, the value of an estate includes:
* possessions, including property;
* pension funds; and
* the value of any money or property given away during the seven years prior to death, subject to certain exemptions.
If your client leaves their property to their children or grandchildren (including adopted, foster or step-children), they may gain an additional tax-free allowance of £150,000. This residential nil-rate band amount increases by £25,000 each April until it reaches £175,000 in April 2020. Any unused part of this amount can be passed on to a surviving partner. This additional exemption is available for someone who died, sold their home or downsized on or after 8 July 2015.
Key IHT considerations include:
* IHT only affects those fortunate enough to inherit an estate or bequest from another - not those who are making the bequest;
* Each individual has an allowance called the nil-rate band, which is free from IHT;
* The nil-rate band is currently £325,000 per individual or £650,000 for married couples and civil partners;
* The residential nil-rate band provides an additional £150,000 (rising to a maximum of £175,000 in 2020) for those leaving their main residence to their children or grandchildren, but it can only be passed on to direct lineal descendants;
* There is a tapered reduction of the residential nil-rate band where the net value of the assets held in an estate at the time of death is more than £2m; and
* Last but by no means least, IHT is a voluntary tax and can easily and legitimately be removed.
Wealth preservation and risk mitigation are critical to ensure capital can be successfully transferred to the next generation.
As Stellar Asset Management business development director Matthew Steiner puts it: "If you are a really good financial planner, you spend your life optimising your clients' position and you want to continue doing that for the next generation and become the architect for the next of kin - and that is a great business model for an advice firm."
In fact, were you aware that, after the death of a client, approximately 90% of assets are lost and two-thirds of spousal benefits leaves the adviser's control?
Creating a solid foundation plan for your clients today can save them thousands of pounds of unnecessary taxation liabilities in the future; ensure the transfer of wealth to their children, grandchildren and other beneficiaries is maximised; and breathe new life into your business with the next generation of clients.
Christina Stone is strategic communications manager at Stellar Asset Management, whose services provide relief from IHT after two years. Next month's column will explore IHT reduction solutions
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