Future-proofing your client’s legacy – IHT planning with protection

Twice as many estates since 2019 are now paying IHT, with the average bill being in excess of £216k. For a married couple, with nil rate bands of £1m, this suggests a total estate of over £1.5m – which means they can afford to do something about it.

Sources: HMRC Tax & NIC receipts 21 March 2023, Techlink/Budget 2018 report and OBR Economic & Fiscal Outlook March 2022 and www.gov.uk/government/statistics/inheritance-tax-statistics-commentary/inheritance-tax-statistics-commentary and https://professionalparaplanner.co.uk/people-paying-iht-doubles-since-2019/

What’s causing this?

Well, no prizes for guessing, house price inflation and excellent investment returns over the last decade, clients taking redundancy/retiring and bringing these sums back into their estate, plus some have inherited wealth from older generations (who benefited from the above).

But the main reason is, because the nil rate band has remained frozen at £325k since April 2009 and will remain so until April 2028. Whilst the residence nil rate of £175k has helped, if it had been based on the increase in average house prices from April 2009 to Feb 2023 (c.85%), it should have been c.£275k now!

Source: https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/february2023

So, what does the future look like?

In reality, something radical would need to happen for estate values and IHT to drop substantially. Whilst any recession could mean lower property and stock market values – but diversification means not all assets behave the same – so would this wipe out the gains already made? As far as property is concerned. there is a deficit in housing supply in the UK, and so any reduction in house prices is likely to be less severe and temporary. As residential property makes up the biggest part of IHT-able estates, many will remain well above the available nil rate bands.

Of course, the Government could consider IHT reforms in its election manifesto pledge, to help boost their chances of winning the next election, but this would have an impact on Treasury income, at a time when the coffers are running dry!

With the FCAs Consumer Duty on the near horizon, this could and should have an impact, as aside from achieving good customer outcomes and avoiding foreseeable harm, it puts a focus on the need for ongoing communication (aka annual reviews). Some may even say the pendulum has swung towards the conversations that advisers aren’t having with their clients...

Over the last decade or so, many advisers with wealth clients have been so focused on growing their investments and pensions to meet their objectives, that they may have lost sight of the growing elephant in the room.

With unwelcome IHT bills becoming more common, what can be done?

Gifting assets may be an efficient way to pass on wealth, as not only can you see the beneficiary enjoy them whilst you’re alive, but it can also reduce your IHT liability if you survive for 7 years. If you don’t, then the beneficiary may potentially incur an IHT charge, but this can be covered with five single life level term policies written in trust – see our gift inter vivos sales aid.

For those clients actively making gifts to proactively reduce their IHT liability, the use of a joint life second death term policy to age 89, with an innovative gift inter vivos carve-out option, may be useful. This covers the current IHT liability and when the client makes gifts, they ‘exchange’ some of the cover for five single life level term policies, with no underwriting – see article here.

However, clients don’t always like the loss of control and access to their hard-earned wealth, especially with the rise in blended families, adding complexity.

Protection policies can overcome these objections, because the client keeps control and access, whilst paying a guaranteed monthly premium, with a guaranteed sum assured on their death to cover the IHT liability. Not only does the full value of their estate pass on as a legacy to the next generation, but as their adviser, you keep the assets under management whilst their alive, and have a greater chance of doing so afterwards.

Whole-of-life (WOL) policies written in trust, with indexation to keep pace with inflation, are often used to meet the IHT liability, and provides cover from day one, compared to the seven-year rule for gifting (or two-year qualifying period for business relief investments). Sadly, conversations often have a greater sense of urgency for clients, after their spouse has died, which can make planning more difficult and expensive, so starting planning with wealthy clients before or at retirement can pay dividends, as they will be able to lock-in premiums at current age, health and rates.

Whilst medical evidence may be required, most lives can be offered cover immediately, and only those where more detailed health information is required, or who are above non-medical limits, will take longer. However, where eligible we provide up to £1m of free cover during underwriting for IHT planning – which can further remove any concerns. One objection is often around the affordability of WOL premiums, but the Zurich WOL calculator can help demonstrate the value the sum assured is adding over and above the premiums.

Of course, if affordability is an issue and/or they expect their IHT liability to reduce (maybe due to gifting), then why not consider Zurich’s conversion option...

Convertible term provides an option for the client to choose to convert some or all of their sum assured to a Zurich WOL policy at any, or multiple times, before the end of the policy term, without any medical questions or underwriting – effectively guaranteeing their future insurability. This could be particularly pertinent in the current environment, as it provides a cost-effective alternative to higher WOL premiums and may be the difference between having cover, or not. Here is an indication of comparative monthly premiums: