One in three (31%) clients are likely to be affected by the frozen inheritance tax (IHT) thresholds, according to a survey of financial advisers from Octopus Investments. This is almost double the number of clients (17%) that advisers say will be impacted by the freeze to the pensions Lifetime Allowance (LTA) announced in this year’s Budget. Both have been frozen until April 2026.
One in three clients affected by the IHT freeze are in the dark
While the majority of financial advisers (64%) say affected clients are aware of the IHT freeze, only 11% say their clients fully understand how the change could impact them, highlighting the need for advice. A third (32%) believe affected clients are still completely unaware of the changes.
When asked what changes their clients will need to make in light of the IHT freeze, financial advisers overwhelmingly (72%) said they’d need to increase lifetime gifting to avoid the 40% tax. This was followed by 37% of advisers who anticipate increased use of investments qualifying for Business Property Relief, which is particularly useful for those wanting to retain access to their money. More than a third (36%) of advisers also expected clients to use lifetime trusts.
Nick Bird, Head of Strategic Growth at Octopus Investments, comments:
“The freeze to inheritance tax thresholds, coupled with rising property prices, means more estates than ever are likely to face an inheritance tax bill. The good news is there is plenty clients can do to make sure this is not the legacy they leave behind.
“Increased lifetime gifting is looks likely to be the biggest change made to financial planning following the IHT freeze announcement. This is an effective and relatively simple way of reducing IHT exposure, provided clients do it within good time. The potential downside is that once the money has been gifted, it’s gone. Now that we’re all living longer, that balance between lifetime gifting and keeping enough to feel secure in our later years has become more difficult, and that’s why lots of advisers are also considering flexible planning solutions, such as BPR, as a more flexible tool to pass money through the generations.
“IHT is a complicated and often misunderstood tax and advisers have a real opportunity to add value to their clients, particularly where they might otherwise fail to recognise the need.”
Just one in six clients affected by the LTA freeze understand how it might impact them
While the survey showed that the majority (67%) of financial advisers whose clients will be affected by the LTA freeze say their clients are aware of it, only 16% understand how it might impact them.
In light of the LTA freeze and the removal of future increases, financial advisers were asked to consider the changes they plan to recommend to clients in response. Half (50%) of financial advisers anticipate that affected clients will redirect contributions into their spouse’s pension to prevent an LTA charge. A similar number (48%) said they’d advise clients to prioritise other long-term savings ahead of making new pension contributions, such as maximising their annual ISA allowance.
Nick Bird, Head of Strategic Growth at Octopus Investments, added:
“As pension wealth increases at a faster rate and contributions become increasingly restricted, more people are having to organise their pension affairs to negotiate a possible lifetime allowance charge.
“Advisers anticipate using a range of planning options in response, including tax efficient alternatives, once pension and ISA allowances are maxed out. VCTs are one such option, offering a number of attractive tax reliefs including tax free income, and allow people to invest up to £200,000 each year with no lifetime limit.
“We also know that pensions are increasingly being used as an estate planning tool. That’s another reason it can be useful to have another form of income in retirement, as it means you can delay drawing down on the pension pot, which can be passed down very efficiently.”
Changes advisers expect affected clients to make to their financial planning following the LTA freeze
| Expected change to financial plan | % of advisers |
|---|---|
| Redirect contributions into spouse’s pension | 50% |
| Prioritisation of other long-term savings e.g. maximising annual ISA allowance | 48% |
| Reducing or stopping pension contributions | 46% |
| Withdrawing tax free cash to reduce the potential second LTA charge at age 75 | 45% |
| Choosing to crystalise funds earlier, to prevent pot reaching the LTA | 44% |
| Recommending lifetime allowance protection | 31% |
| Increased use of tax efficient investments as long-term compliment to pensions (e.g. VCTs / EIS) | 30% |
| Increased use of tax efficient investments to mitigate income tax (e.g. VCTs / EIS) | 25% |
| No change – clients would accept the tax charge on the excess | 7% |
-Ends-
Notes to editors:
- Research was conducted by Opinium amongst 208 financial advisers between 29th April – 4th May 2021
For journalists in their professional capacity only. The value of an investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest. Tax treatment depends on individual circumstances and may change in the future. Tax reliefs depend on the portfolio companies maintaining their qualifying status. The shares of smaller companies and VCT shares could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell. Personal opinions may change and should not be seen as advice or a recommendation. We do not offer investment or tax advice. We recommend investors seek professional advice before deciding to invest. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. We record telephone calls. Issued: May 2021.