Inheritance tax is quickly becoming one of the biggest lifetime expenses for Brits.
In April 2022, HM Revenue & Customs (HMRC) collected a total of £500m ($660m, €600m) in IHT. Analysis by the Office for Budget Responsibility (OBR) revealed that HMRC is forecast to collect around £37bn in inheritance tax over the next five years, with the annual sum growing year-on-year.
Unfortunately, unadvised clients are constantly being stung because they are unaware of the thresholds and the IHT system.
Advice clients have the upper hand. They are being helped by advisers who have tools to tackle the rising burden of IHT.
There is one tool which is becoming more popular again, and inheritance planning is the main reason. That tool is onshore bonds.
Rising demand
Mark Lambert, head of onshore bond distribution at HSBC Life, told International Adviser: “The onshore investment bond is having a bit of a resurgence out there in the marketplace.
“According to Association of British Insurers (ABI) statistics, in 2019, the bond market on the onshore side was up to £3.9bn market size. In 2020, with the pandemic, it came down to £2.5bn, and last year, it bounced back up to £3.2bn.”
“Advisers are still very much utilising this product. We are out there positioning the bond as having ongoing relevance to the advisers’ client. We think the ability for onshore bonds to meet clients’ needs for investment and later life financial planning is particularly powerful.”
“They can be a hugely important product in the inheritance tax space. That is the main reason that they’ve been used.”
“Bonds have been used an awful lot with an eye to intergenerational planning and what we are saying is do that but why wait until your advancing years to consider these tax effective wrappers and their potential to enable investment growth.
“If investors have utilised their ISA and pension allowances, from a flexibility perspective it makes sense to review whether further investment monies should be placed in a bond structure because of the options it provides as individuals move through their investment lifestages.”
Adviser conversations
Lambert said that first approaches by advisers on onshore bonds usually start around IHT. But he said that he leverages the IHT introduction to discuss the other positive aspects of onshore bonds.
“An adviser might have an older client that they are putting a financial plan together for and we can discuss how a bond can be helpful for that client at different stages of their life,” Lambert added.
“A number of enquiries we get now are from advisers who’ve got clients with significant ISA pots, and they are clearly aware that at some stage, once that pot has passed to their client’s spouse/partner, it may well end up in an estate that could be subject to inheritance tax.
“There’s a number of advisers who are stripping out money from ISA pots and placing them in bonds to enable the seven-year clock to start ticking and work to ensure that money is passed intergenerationally in a tax-effective manner.
“With an open-architecture onshore investment bond, you’ve got a whole range of funds, that can be from lowest risk cash funds right through to equity funds of various global jurisdictions that can be placed within a bond, so that you can actually fulfil your clients’ investment needs as you would in an ISA or a Sipp, but within the bond wrapper, because you’ve got a breadth of investment choice.”
