The great wealth transfer makes the process it describes sound deceptively straightforward: one generation has accumulated assets and, over time, much of that wealth will pass to the next.
In practice, there’s a lot more going on.
People are living longer, which means they need to think carefully about how much money they might need themselves before deciding what to pass on. Asset values have risen, while the inheritance tax (IHT) nil-rate band has been frozen at £325,000 since 2009. As a result, inheritance tax is becoming relevant to families who might not previously have given it much thought.
To make matters even more complicated, the rules advisers are planning around have been moving.
As the new Chancellor John Healey gets to grips with the complexities of estate planning, he will spot an opportunity to bring some stability to this landscape. That starts with recognising the mismatch between the long-term nature of inheritance planning and the much shorter cycle of tax policymaking.
Policy vs planning
That doesn’t mean inheritance tax should never change. There are reasonable debates to have about thresholds, reliefs and whether they’re achieving what they were designed to do. The problem is that inheritance planning happens over years, often decades, while tax policy is shifting at a much quicker pace.
Gifting is an obvious example. A client might want to pass money to children or grandchildren, but longer retirements complicate that decision because clients need to think about their income, later-life care and unexpected costs that might crop up. Once money has been given away, getting it back is not always an option.
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Starting estate planning earlier therefore shouldn’t automatically mean giving assets away sooner. It means having more time to work out what the client can afford to pass on, and which options might suit them.
Changing the rules those decisions are based on throws a spanner in the works. The first area that needs attention is therefore offering greater long-term visibility around IHT policy, so that families aren’t repeatedly making important decisions against moving goalposts.
The challenge for advisers
Advisers have recently had to digest reforms to agricultural property relief (APR) and business telief (BR), while most unused pension funds and death benefits are due to be brought within estates for inheritance tax purposes from April 2027.
For advisers, this makes looking at the whole estate increasingly important. The question isn’t simply how to reduce a potential inheritance tax liability. It’s how to do that without losing sight of what the client may need themselves and their long-term objectives.
Even if the rate of change doesn’t shift, Healey could consider how future reforms are introduced. That means proper consultation and sensible transition periods that give financial advisers more time to understand the implications of changes, and clients more breathing room to act proactively rather than reactively.
Building in flexibility
There are a plethora of estate planning options available, one of the most flexible of which is business relief which can be used alone or as part of a wider financial plan. Currently, every individual has a £2.5m business relief allowance and, for the right client, this can help address a potential inheritance tax liability. Business relief can be useful for someone who wants to plan ahead but doesn’t necessarily want to give capital away permanently, because we all have the ‘what if’ scenario and might need the money back.
Utilising business relief involves buying shares in one or more trading companies, and different services can invest in very different things. Advisers need to understand where a client’s money is going, how returns are generated, what risks are being taken and how the client can access their capital if circumstances change.
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At PXN Investments, for example, capital invested through our business relief service is used to lend to UK SMEs. Other services may take a very different approach, so while the tax treatment might be similar, the underlying investment may not be. Adviser due diligence and an understanding of the different asset classes is therefore imperative.
That’s why trying to predict every Budget isn’t a workable solution. Financial advisers can keep plans under review, start conversations earlier and make sure a client’s strategy isn’t dependent on one particular tax treatment. But greater certainty has to come from policymakers too.
Finding a middle ground
For Chancellor Healey, that doesn’t mean leaving inheritance tax untouched indefinitely. Governments should be able to make changes where they’re needed, but those changes should sit within a clearer and more predictable framework. If people are being asked to make decisions that may affect their finances for decades, they need a reasonable idea of the framework they’re making them within.
The great wealth tansfer will happen over decades too. And the people passing that wealth on are likely to spend longer in retirement, making access to capital and flexibility just as important as investment performance and tax efficiency.
Advisers can help clients navigate uncertainty, but they can’t remove it. A more stable approach to inheritance tax would give families more confidence to make long-term decisions and financial advisers a firmer foundation on which to help them.
Caroline Flagg is deputy managing director at PXN Investments
