One third (31%) of 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 their clients (17%) that advisers said would be impacted by the freeze to the pensions Lifetime Allowance (LTA) announced in this year's UK Budget. Both thresholds have been frozen until April 2026.
Research was conducted by Opinium amongst 208 financial advisers between 29 April and 4 May 2021.
While the majority of financial advisers (64%) said affected clients were aware of the IHT freeze, only 11% say their clients fully understood how the change could impact them, highlighting the need for advice.
A third (32%) believed 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, said: "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.
He added: "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."
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 had advised clients to prioritise other long-term savings ahead of making new pension contributions, such as maximising their annual ISA allowance.
Bird said: "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."
Changes advisers expect affected clients to make to their financial planning following the LTA freeze:
- 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%
