Mitigating rising inheritance tax – the need for an effective estate planning solution

While the recent Spring Statement brought in a variety of tax changes, its failure to offer any change for inheritance tax thresholds could see many facing rising IHT bills in the months ahead. As inflation is predicted to rise above 8% this Spring and the nil-rate band is still set to remain frozen until 2026, more people could be facing rising IHT and, therefore, seeking effective solutions.[1]  Indeed, according to a leading financial title, ‘If the current freeze follows the patterns set previously, it could trigger growth in receipts of 60 per cent, taking total IHT revenue to £8.5bn by the end of 2026.[2]

As advisors are supporting an increasing number of clients seeking to tackle this climbing IHT, an estate planning solution that targets capital growth, but also reliable returns will be essential. In light of this, prioritising diversification, such as through investing in a range of companies that provide funding through lending and leasing, could become an increasingly important strategy for advisors to consider.

Inheritance tax (IHT) on the rise

With inflation reaching a 30-year high of 6.2% this month and showing no signs of slowing, more people will be finding themselves liable for IHT as the threshold remains unchanged.[3] Equally, the pandemic has triggered an exponential rise in property prices with the average price of a house increasing by 10.8% in the year to February 2022.[4] As house prices have risen and the residence nil rate band has not, it has become increasingly difficult for households to remain under the threshold. In fact, IHT receipts from April 2021 to February 2022 have already reached a record high of £5.5 billion, a 14% increase on the previous year.[5]

However, these IHT bills are expected to rise even further with an anticipated £6.1 billion in the coming tax year[6] due to rise to £8.5 billion by the end of 2026.[7] As a result, more and more clients will be seeking effective estate planning solutions to mitigate this seemingly long-term rise in IHT.

Time to diversify

However, as an increasing number of clients begin to consider solutions to rising IHT bills, they will also be seeking a strategy which targets predictable returns. As a result, it could be crucial for advisors to advocate for the advantages of diversification in terms of ensuring the long-term health of clients’ savings. One option is direct lending, which is an investment strategy that can offer diversification as well as returns which are uncorrelated to equity markets.

The benefits of diversification in terms of spreading risk and improving returns is widely acknowledged. Diversifying investment can help limit exposure to any single asset, therefore spreading risk, and improving the yield and consistency of income as different assets deliver varying performances at different times.

Direct lending has historically been the preserve of banks and large financial institutions. However, it has evolved to become increasingly accessible for a wider group of investors providing access to an asset that is not correlated with equity markets. For example, Triple Point’s Estate Planning Services targets predictable returns and growth by investing in a diverse portfolio of lease and loan contracts across a range of UK business. This offers investors estate planning solutions with returns that are unaffected by wider volatility as the share price is based on the net asset value of the book rather than rising and falling in line with supply and demand.

This non-bank lending sector also addresses the increasing demands to support SMEs. For example, Triple Point provided £285m of financing to UK-based organisations by March 2021 as it supported smaller businesses that were impacted by the pandemic. Managing a diverse debt financing book with c.£750m of AUM, Triple Point’s Estate Planning Service is an example of the options available for those seeking to mitigate IHT rises and receive reliable returns by prioritising diversification.

As a result, this solution can offer clients an estate planning tool which is both effective and targeting predictable returns. With an increasingly large number of clients being forced to alleviate the effects of rising IHT, prioritising a strategy of diversification will be crucial to mitigating risk and protecting clients’ long-term savings.

Don’t forget impact

Considering IHT bills having been steadily rising since 2009, the reason IHT relief has become a priority for many clients is clear. However, at the same time, investors have also become more and more interested in delivering impact. In fact, 42% of investors[8] were involved with impact investment last year.

Adopting a strategy which offers investors both vital IHT relief and the ability to generate impact is crucial. Leasing strategies can play a crucial role in driving financial and societal benefits through offering support to a broad range of groups which are fundamental to our economy. For example, Triple Point’s Estate Planning Services offers investors the ability to drive impact through the provision of lease and loan contracts that provide both the public sector and SMEs with vital support.

For example, in April 2020, Triple Point provided a regional country hospital with ventilators during the height of the pandemic’s first wave. Equally, Triple Point’s Estate Planning Services has supported tens of thousands of UK SMEs, a crucial element of our economy which has faced increasing pressures throughout the pandemic. This strategy offers investors reliable returns with 100% IHT relief from the amount invested after two years while also providing the ability to deliver impact.

As the economic climate remains uncertain with inflation continuing to rise, more and more people in the UK will be facing rising IHT bills. As a result, the number of clients seeking an effective estate planning solution is set to rise. This larger cohort of clients pursuing vital IHT relief will also be seeking a strategy which targets reliable returns, making diversification a key tool for advisors to utilise. However, with investor demands shifting, IHT relief is no longer enough. Adopting an estate planning solution that delivers both profit and purpose will be the key to meeting the demands of investors in the year ahead.

[1] https://www.bankofengland.co.uk/knowledgebank/will-inflation-in-the-uk-keep-rising#:~:text=We%20expect%20inflation%20to%20rise,the%20next%20couple%20of%20years.

[2] https://www.ftadviser.com/opinion/2021/05/24/iht-receipts-will-rise-further-after-nrb-freeze/

[3]https://www.ftadviser.com/your-industry/2022/03/23/tax-tricks-pulled-out-of-the-chancellor-s-hat/

[4]https://www.express.co.uk/finance/personalfinance/1587373/inheritance-tax-iht-threshold-allowance-uk-housing-market

[5] Ibid

[6] https://www.telegraph.co.uk/business/2022/03/25/rishi-sunak-set-rake-extra-22bn-inheritance-tax/

[7] https://www.ftadviser.com/opinion/2021/05/24/iht-receipts-will-rise-further-after-nrb-freeze/

[8]https://www.ftadviser.com/investments/2022/02/28/have-your-say-are-clients-interested-in-impact-investing/

 

 

APRIL 21, 2022
(IFA Magazine)
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