Written by Dave Harris, CEO at later life lender, more2life
Inheritance Tax (IHT) continues to prove a useful levy for the Treasury. The latest official data shows that receipts for the first quarter of the tax year came to a new record high of £2.2 billion, a jump of £100 million on the same period of last year.
IHT is a tax that relatively few estates actually pay, yet measures by both the current and previous administrations mean it will be a more significant concern for greater numbers of people in the years ahead.
Compounding this issue is the government’s decision to bring undrawn defined contribution (DC) pensions into IHT calculations from April 2027 — a move that could result in a combined tax rate of up to 67% on some inherited pension assets.
Indeed, a factor in this latest record-breaking quarter is that the tax-free thresholds for IHT have been frozen until the end of the decade. These thresholds have not followed inflation for some time, meaning that each and every year more and more estates move beyond those thresholds and become liable for the tax.
And with further changes on the way, advisers should be prepared for IHT to become more commonplace in their client conversations. Now is the time to not only understand and proactively plan for those changes, but review how options like lifetime mortgages may prove effective in limiting the eventual tax bill.
Increasing estates
The Government has confirmed it is pushing ahead with its plans to include unused pension funds and death benefits payable from pensions when calculating the value of an estate. The plans were first revealed in last year’s Budget by the Chancellor, and will push the value of the average IHT burden up by around £34,000.
The proposed changes to the IHT setup will mean far more estates become liable for the levy. A Freedom of Information request earlier this year found that the Office of Budget Responsibility expected more than 30,000 estates to become subject to Inheritance Tax as a result of the shifting rules over the next three years, while more than 150,000 estates will face a higher eventual bill.
That’s a lot of homeowners and their families who will potentially find that they are not able to pass on as much of their assets as hoped, opening the door for advisers to educate them on the potential benefits of utilising a lifetime mortgage in order to limit such tax liabilities.
Balancing concerns
Our conversations with advisers have made clear that in recent months they have seen a host of clients for whom the eventual IHT liability has been a significant consideration. These borrowers often wanted to provide some financial support for their loved ones or supplement their existing pension savings, while in the process reducing the likely IHT burden their estate would eventually face.
Downsizing could allow them to do so, but would inevitably involve a certain level of upheaval. By contrast, making use of a lifetime mortgage would unlock those funds and allow them to provide the financial support to their loved ones, while potentially dropping the value of the estate below that at which IHT would become a concern.
Given the proposed changes to the IHT regime, and the broader range of assets which will be included within the liability calculations, this is only likely to become a more commonplace consideration.
This is where the flexible features incorporated by modern lifetime mortgages can really come into their own. Interest Reward products, where borrowers can obtain an interest rate discount by committing to making payments each month, allow a far greater level of control over the eventual cost of borrowing.
Similarly, the wide variety of early redemption charges available – including our own zero ERC product – mean that no matter what the circumstances, there will be a lifetime mortgage which can help the borrower meet the needs of both themselves and their loved ones.
Great advice, from both financial advisers and tax specialists, will allow those clients to carefully manage their estate, get the most from their equity and mitigate their tax liabilities in the process.
The opportunity for advisers
These conversations also open the door for greater collaboration between financial advisers, wealth managers, and tax specialists. Lifetime mortgages shouldn’t be considered in isolation – they are most effective when integrated into broader wealth and estate planning strategies. However, there will likely be far more clients who are unaware of just how these new rules might impact their estate after death. Advisers can play the role of educator here, highlighting what the new rules mean for their clients as well as how a lifetime mortgage can prove effective in combatting them. They also have the opportunity to open the eyes of tax specialists, providing valued peer-to-peer advice on how these products can deliver for their own clients.
These changes represent a great opportunity for advisers to build new partnerships, aligning themselves with tax specialists who can not only provide valued insights to clients who prioritise lowering their tax bill, but may also deliver referrals in the future to boot. After all, while advisers can signpost the potential of lifetime mortgages reducing the size of a tax bill, this sort of planning really does require specialist advice.
Now is the time to talk about IHT with your clients, to make sure they understand the new rules as well as the increasing likelihood of their estate falling within the thresholds. Property wealth can and should play a central role in any tax efficient estate planning, but that can only happen with the support of quality advisers.
