Inheritance Tax Planning: The Next Ten Years?
New research suggests that the total annual amounts passing from one generation to the next will rise from the current level in 2017 of £69 billion to £115 billion by 2027. That is a 66% increase over the next ten years!
The research was conducted by the Centre for Economics and Business Research for the estate administration firm Kings Court Trust.
The report identifies two well publicised factors.
The first is the profile of an ageing population. The Office of National Statistics population projections show that there will be a 7% increase in the number of deaths in the UK between 2017 and 2027, from 566,000 to about 606,000 a year. The increasing number of deaths in over the next ten years is significant when viewed in the context of the second factor.
The second factor is the rise in the value residential and investment property prices over the last few decades. According to ONS data, the total net worth of UK households increased by a factor of 3.6 from £2.8 trillion to £10.2 trillion between 1995 and 2015 – even taking into account the 2008 financial crisis.
In other words the next decade will experience a higher death rate among those who are likely to be holding property with significant value.
The long housing boom, which has resulted in increasing un-affordability of residential property for younger generations, has contributed to a situation in which home ownership has declined sharply for those under the age of 35, while ownership rates have risen slightly for over 65’s. A rising proportion of the UK’s housing wealth has become concentrated in the hands of older age groups, and the life chances of younger people are now being strongly influenced by their prospects of an inheritance from their parents. .That inheritance will often be represented by residential and investment property.
The report is very much angled towards the opportunities for IFA’s over the next ten years – advising younger family members on investments when properties are sold following a parental death. The cumulative value of these inheritances over the next decade will reach £1 trillion, according to the report. According to Kings Court Trust, the ‘inheritance economy’ created by this boom offers an opportunity for independent financial advisers. Illiquid property wealth is set to be sold off on an enormous scale. This increases the stock of cash that could be invested and the number of individuals needing investment advice.
However, the impression that professional advisers just need to passively stand on the side lines and await some sort of feeding frenzy is a little optimistic.
The more obvious point for those professional advisers, including IFA’s, who specialise in tax to any degree is, rather, whether those families are receiving effective inheritance tax planning advice today to ensure that the tax hit on death is less than it otherwise would be.
For the larger estates, the reality is that inheritance tax will significantly impact on the anticipated funds where there is little parental planning or advice over the next few years. A lack of tax advice over the next few years will also, I suspect, impact on the decisions children make when they inherit. It is likely that the net funds released will be used by a cash strapped younger generation to acquire their own properties, settle debts including mortgages or simply spend it on lifestyle choices. It is also a rather big assumption where investment property portfolios are concerned that senior family members are simply going to retain their properties until they die and that the junior family members will have no interest in continuing the family property business. Many will but the savvy see these assets primarily as family wealth, not the wealth of a single family member.
Advisers who can orchestrate and manage these inter-generational transfers of wealth in life as well as on death against the backdrop of the predictable tax consequences are more likely to be those who are retained as trusted advisers. They may be IFA’s, accountants, solicitors and, yes, tax advisers. They will tend to be those who have effectively managed a families inheritance tax planning over the preceding few years rather than those who have maintained a fairly obvious and awkward silence over tax and who then expect to cash in after the death, whatever their professional background.
There is a noticeable trend towards inheritance tax planning being driven not by those with wealth but by their adult children who see a very real and personal threat approaching. A combination of parental procrastination together with lack of leadership from traditional advisers means that savvy younger family members are now commissioning independent advice which then acts as the catalyst for senior family members to start planning with enthusiasm. I anticipate that this trend will accelerate over the next two or three years where property portfolios, both residential and commercial, form the foundation of family wealth.