Puma Investment’s latest Estate Planning survey, which was conducted in partnership with Opinium, highlights how more and more people are finding their estates are subject to IHT.
Puma’s CEO, David Kaye looks at just some of the reasons he believes that IFAs should avoid putting IHT planning on the back burner
We recently saw HMRC release its latest tax receipt figures. We recently saw HMRC release its latest tax receipt figures. Total tax receipts for April 2022 to December 2022 were £553.2 billion, which is £48.0 billion higher than the same period a year ago. Ten years ago, total tax receipts were £250.4 billion for the same period – so there has been nearly a 96% increase in a decade.1
In percentage terms, some of biggest increases in receipts came from business taxes (23%), stamp taxes (19%), income tax, capital gains tax & NICs (13%). However, what’s particularly of interest to us is that receipts from inheritance tax, which saw a substantial increase over the period of 16%. Often perceived as a tax that affects only the very wealthy, with continued stagnation on the IHT thresholds, more and more people may find their estates subject to IHT.
IHT no longer a tax for ‘the wealthy’
Increases in IHT receipts are nothing new. In the financial year 2021 to 2022, total IHT receipts were £6.1 billion. This was an increase of 14% (£729 million) on the financial year 2020 to 2021, and the largest single-year rise in IHT receipts since the 2015 to 2016 financial year, when receipts rose by 22% (£848 million).2 We recently saw HMRC release its latest tax receipt figures. Total tax receipts for April 2022 to December 2022 were £553.2 billion, which is £48.0 billion higher than the same period a year ago.
What’s also interesting is that the Office for Budget Responsibility (OBR) forecasts IHT receipts will reach only £8.3 billion by 20263 and yet the latest figures show that in the last six months alone, HMRC has received £4.8 billion in IHT, which is £0.6 billion higher than in the same period a year earlier. If such a level were to be maintained, it would make this year the highest on record for IHT receipts and would overshoot the current OBR predictions by a considerable margin.
The current nil-rate band threshold of £325,000 for a single person (with an additional transferable main residence nil-rate band of £175,000 available when passing the family home down to children or other direct descendants) has been in place since 2009. In the Chancellor’s recent Autumn Statement, he confirmed that inheritance tax thresholds will be maintained at their current levels for a further two years, to April 2028. For many people, their home is their greatest asset, and current estimates show that the average house price in the UK is now £296,0003 – only £29,000 short of the basic nil-rate band.
Yet despite clear evidence that more and more people are being caught by IHT, our recent research among advisers shows that 1) estate planning and mitigating IHT, and 2) passing on inheritance, fall a long way down the list of client financial planning priorities at 25% and 22% respectively.
As the chart below illustrates, over three quarters of advisers are focused on managing clients’ finances through the cost-of-living crisis as their number one priority. But is this saving up a problem for the future?
More urgent focus needed on estate planning
While it’s clear that advisers need to focus on ensuring clients have enough funds to provide for themselves in later life, it’s also evident that estate planning shouldn’t be put on the back burner – particularly for those clients who have significant wealth tied up in property assets. The average house price in London, for instance, is £542,000 and in the South East is £404,990.4
Gifting remains a popular choice – and our survey revealed that about three quarters of advisers see gifting as the most popular estate planning strategy among their clients. This is followed by settling assets into trust (46%). But if property forms a large part of the estate and the clients wish to remain in the property, this may not be an option.
Some advisers have looked at lifetime mortgages (LTMs) as a potential solution. Clients can remain in the home, and with careful planning can make an intergenerational transfer. And while house prices have been increasing in recent years and LTM interest has been low, this has proved a more attractive option. However, the current economic climate has seen house price growth stalling, and rates increasing across the board for all types of mortgage. This may make LTMs less desirable in the short term, given that debt accumulates much faster with higher interest rates.
Business Relief – an appealing solution
There is another option – Business Relief (BR). BR is a tax relief offered on shares in certain private companies and certain companies listed on the Alternative Investment Market (AIM). As long as the company that the shares are being held in is a mainly trading company5 they can attract BR, and unlike gifting or trusts, which can take seven years to obtain full IHT relief, BR-qualifying investments can benefit from relief after just two years. The key qualification for BR is that the investment is made into a qualifying trading business; this is defined as a business of which less than 50% of its total activity is investment-related activity. To qualify, individuals don’t have to own their own business – instead, they can invest in either private trading companies or AIM-quoted companies. A key benefit of BR is that it enables a client to retain control of their assets in their own name, and to generate a positive return.
Private trading companies
There is a range of discretionary services available, which will find and allocate capital to private trading companies. A broad range of potential companies can be accessed through such discretionary services, from property lending to renewable energy. Most of the solutions available aim to target consistent returns of 3-5% per annum, and offer the ability for investors to make ad hoc withdrawals, should their circumstances change.
To this end, we launched Puma Heritage Estate Planning Service (EPS). This is an investment solution that aimed at providing investors with 100% relief from inheritance tax after two years. Puma Heritage EPS, through its portfolio company Puma Heritage Ltd, makes loans to enhance social infrastructure across the UK. Puma Heritage Ltd has financed the construction of developments ranging from care homes to supported living units for young people with autism, as well as children’s homes, place-making and affordable housing.
As of last year, Puma Heritage Ltd had arranged over £1 billion of loans and construction projects with no capital losses to date. We believe this service will continue to be a useful tool for investors over the coming years, as they look to mitigate the impact of inheritance tax on their finances.
In 1995, the London Stock Exchange launched AIM – a junior stock market for small, growing companies. Since 1996, AIM shares have been classed as unquoted, and therefore private investors have been able to hold shares in AIM-listed companies and pass them on free from IHT, provided the company qualifies for BR and the investor has held the shares for at least two years when they die.
AIM IHT solutions allow investors to access growth companies, which within a portfolio will seek to deliver good investment returns through capital growth and dividends – as well as providing IHT relief if held for more than two years. In 2013, changes to ISA rules allowed AIM-listed shares to be included in an ISA, which subsequently permitted many facing an IHT liability to transfer some or all of their current ISA pots over to an AIM ISA. Investors continue to benefit from the capital gains tax and income tax exemption, but once held for two years, the asset is also classed as IHT-exempt, as long as still held on death.
The need for holistic estate planning now
Our research suggests that more than 50% of advisers aren’t regularly considering discretionary services that seek to invest in BR-qualifying companies as a solution to IHT planning, despite the benefits that these discretionary services offer – from maintaining control of assets, to drastically reducing the time a client’s estate is exposed to IHT.
While advisers clearly have to juggle a number of client priorities with the current cost-of-living crisis and sustained volatility across many investment markets, estate planning should – particularly for those clients with substantial property wealth – be an important part of any annual review. That means considering the estate – and all the options available – in a holistic way, including the need to have in place adequate wills, and ideally, lasting powers of attorney.