As seen in Professional Adviser.
Inheritance Tax (IHT)is set to become a concern for greater numbers of the clients financial advisers see on a daily basis.
The levy was subject to changes announced in the Budget last Autumn, aimed at increasing revenues from higher value estates. Under the current plans, from 2027, unused pension funds and death benefits payable from pensions will fall within the scope of the tax.
It’s a move that will mean thousands more estates will become liable for Inheritance Tax.
A Freedom of Information request from Interactive Investor shows that the Office for Budget Responsibility thinks, in the following three years, more than 30,000 estates will become subject to the tax, while 152,700 estates will face an increased liability.
Given this increase, it’s likely advisers will see more clients looking for guidance on how to limit their eventual IHT liability. And while making the most of annual allowances and the like are a sensible first step, I’d also argue lifetime mortgages merit serious consideration in many cases.
Later life lending in action
We had a case recently which demonstrated how effective later life lending can be for these purposes. The borrower was a widow in her 80s, with a property worth £1.7 million and substantial assets. She wanted to reduce her IHT burden while providing some financial support for her three sons, alongside ensuring she had sufficient resources to cover any future care costs that may emerge.
By utilising a lifetime mortgage, she was able to gift funds immediately to her children, effectively providing them with an immediate inheritance. Importantly, she was also able to remain in her home. While she could have unlocked funds to gift to her loved ones through downsizing, this obviously would have involved an additional level of upheaval which she wanted to avoid.
However, the primary driver of the move was to mitigate her IHT liability, and this was successfully achieved - the £700k lifetime mortgage she obtained took the value of her estate below the £2 million threshold. This is the point at which the Main Residence Nil Rate Band starts to taper away, so reducing the estate below this point puts her in the best possible position for keeping her IHT liability as low as possible.
Flexible features are proving popular
An important factor in the increased appeal of lifetime mortgages among high net worth clients is that the products have evolved. Providers have risen to the challenge of developing more flexible products which can be tailored by the borrower to meet their specific needs.
For example, it has become far more common for lifetime mortgage products to allow borrowers to make payments towards the interest throughout the term of the loan, reducing the eventual liability. At Standard Life Home Finance, we have taken this a step further with our Horizon Interest Reward lifetime mortgage, which offers an interest rate discount for the life of the loan if the borrower commits to making interest payments for a set period.
There is also much more variety in the Early Repayment Charge periods in place. For example, Standard Life Home Finance plans come with an eight-year early repayment charge period. It means if the client suspects their circumstances may change in the years ahead, they are not tied into exit fees for an extensive period.
This is why the adviser is such an important ally for such clients, helping to navigate the varied options to identify a solution and provider that truly aligns with their customer’s requirements.
Collaboration is crucial
Whenever tax is a significant factor, it’s important to get specialist advice. This is where it’s vital to work closely with providers who value collaboration, and embrace the opportunity to work closely with both financial advisers and tax advisers.
That focus on teamwork ensures the borrower enjoys the smoothest and most efficient experience, allowing them to move on with their lives.
Providing the full range of options
With lifetime mortgages providing an excellent option for older clients who want to manage their IHT position, the question then becomes how advisers go about adding later life lending to the range of options discussed with their clients.
Some will want to handle this themselves, adding the required certifications/authorisations to their skillset, but others will prefer to partner with later life specialists who provide a referral route.
The right solution will vary based on the individual advice firm, but what’s clear is that advisers will need to have a plan in place for including the products in their advice process.
Sanjay Gadhia, Head of Sales at Standard Life Home Finance
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