Frozen IHT thresholds will impact ‘twice as many clients as LTA’

One in three (31 per cent) clients are likely to be affected by the frozen inheritance tax thresholds, making up more than twice as many as will face a lifetime allowance charge, according to a survey of financial advisers from Octopus Investments.

In this year’s Budget it was announced that both the pensions lifetime allowance and IHT thresholds would be frozen until April 2026.

But advisers believe frozen IHT will impact almost double the number of clients (17 per cent) than the frozen LTA.

While the majority of financial advisers (64 per cent) said affected clients are aware of the IHT freeze, only 11 per cent say their clients fully understood how the change could impact them.

A third (32 per cent) believed affected clients were still completely unaware of the changes.

When asked what changes their clients would need to make in light of the IHT freeze, financial advisers overwhelmingly (72 percent) said they’d need to increase lifetime gifting to avoid the 40 per cent tax.

This was followed by 37 per cent of advisers who anticipated 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 per cent) of advisers also expected clients to use lifetime trusts.

Nick Bird, head of strategic growth at Octopus Investments, said: “The freeze to IHT thresholds, coupled with rising property prices, means more estates than ever are likely to face an IHT bill. The good news is there is plenty clients can do to make sure this is not the legacy they leave behind.”

He said increased lifetime gifting was likely to be the biggest change made to financial planning following the IHT freeze announcement.

“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.”

LIfetime allowance

The research also showed that just one in six clients affected by the LTA freeze understood how it might impact them.

While the majority (67 per cent) of financial advisers whose clients will be affected said their clients were aware of it, they felt that only 16 per cent actually understood how it might impact them.

In response, half of financial advisers anticipated that affected clients would redirect contributions into their spouse’s pension to prevent an LTA charge.

A similar number (48 per cent) said they would advise clients to prioritise other long-term savings ahead of making new pension contributions, such as maximising their annual Isa allowance.

Changes advisers expect clients to make 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%

Source: Octopus Investments

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