The great wealth transfer: Planning for inheritance tax

The ‘great wealth transfer’ is already underway. In January 2024, the Guardian reported that inheritance is “about to divide millennials into haves and have-nots” – and that this transfer of assets and/or cash from older generations to younger ones is “driven by legacies and parents ‘giving while living’.” The coronavirus pandemic caused the biggest loss of life in the UK since the second world war, it added, and most of the 208,000 “excess deaths” between March 2020 and May 2023 were elderly people. 

HMRC’s figures on inheritance tax (IHT) and capital gains tax (CGT) back this up. Government receipts from CGT were £17bn for the year ended 31 March 2023, up from £15.8bn for 2022 and £12bn for 2021.

IHT receipts for April-to-December 2023 were £5.7bn – a £0.4bn rise on the same period in 2022. Wealth management firm Evelyn Partners calculates that IHT receipts for 2023/24 are on track for a record £7.6bn – a 7.5% increase on the previous all-time high of £7.1bn in 2022/23, and a £1bn increase on 2021/22. The firm’s tax partner Laura Hayward says the increases result from rising asset values, particularly for property, and frozen IHT thresholds. 

With potential IHT changes being considered by both the government and the opposition, Paul Ayres, head of private client services at BDO, says that “now is a good time to discuss with clients what their priorities are for business and wealth succession planning”. 

When advising clients on how they should pass on their wealth, Ayres explains it is important to understand their objectives and their family dynamics, as well as their own current and future needs for capital and income. Once an adviser understands a client’s priorities, then you can consider how to achieve their aims, including any tax-efficient options. 

Giving it away 

The challenge “is always balancing the need” for continued assets and the income they generate to fund later life, with giving assets away to reduce the size of the estate subject to IHT, says Tim Stovold, head of tax at Moore Kingston Smith. Regardless of their level of wealth, “many clients fear running out of money later if they start giving too much away now,” he adds. 

Given how complex UK tax rules are, a range of different taxes could apply depending on what assets are gifted, notes Kate Aitchison, tax director at RSM UK. For example, where an individual is gifting residential property, the gift could be subject to IHT, CGT and/or stamp duty land tax (SDLT) if not structured correctly, she explains. “A gift of cash, however, may only crystallise a charge to inheritance tax.” 

For a gift to be tax-free for IHT purposes, in most cases the individual making the gift needs to survive the gifting date by seven years. However, regular gifts out of income that don’t reduce a person’s standard of living can fall outside of the estate immediately. This means starting small, regular gifts early can be more tax-efficient than large one-off gifts later on. 

Anti-avoidance rules stop gifts being free of IHT if the person making the gift still benefits from the asset given away, Tim Stovold notes. For example, parents giving the family home to their children while continuing to live in it would be subject to IHT “unless the parents pay their children rent to reside there,” he explains. Kate Aitchison agrees: “If a parent gifts their house to their children, then unless they are paying a market rent to use the property, they have retained a benefit in the property” and IHT may apply.

A donor cannot retain a benefit – gifts must come with no strings attached, and the value of the asset must pass in full to a beneficiary. “Gifting any assets – whether on lifetime or on death – can have a tax impact for the donor and potentially the donee [recipient], which the client needs to be aware of,” she says. 

There are various steps that can be taken to reduce a future IHT liability, explains Laura Hayward, including keeping an up-to-date will to ensure that assets are distributed according to one’s wishes. A deceased spouse or civil partner can pass their estate to their surviving spouse without immediate tax consequences, and any unused IHT nil-rate band can then be passed on to the spouse for them to use in the future. Before the end of a tax year, individuals may want to use their annual gifting allowances before they expire, “as gifting will help to reduce the size of an estate – perhaps taking it below the nil-rate band,” says Hayward. “Likewise, as defined contribution pension pots are very IHT-efficient, some might look to use up their annual pension allowance with extra contributions.” 

Not just about tax 

Often the best advice is given collectively by a client’s tax, legal and financial advisers, Kate Aitchison says, especially for high-net-worth clients, who tend to have complex affairs. “A client can be comfortable that they understand all the implications of a potential gift, from both a tax and a practical perspective, and to ensure that gifts are properly documented and implemented so they are effective.” 

However, Paul Ayres advises that tax shouldn’t be the only consideration when discussing wealth or succession planning. “There is a danger that by focusing exclusively on specific tax issues, you could miss many wider points,” he adds. 

It is important to remember that delaying planning also carries risks, Ayres adds. Any plans made on how to transfer a person’s wealth need not be implemented straight away, but “having discussions and, if desired, getting some of the paperwork sorted in advance will make it easier for your clients to achieve their goals”.