A rising number of clients are likely to be hit with an inheritance tax bill, considerably more than will be affected by the Government’s recent freeze on the pensions Lifetime Allowance.
New research from Octopus Investments shows one in three (31%) clients are likely to be affected by the ongoing IHT freeze, almost double the number of clients (17%) that advisers say will be impacted by the freeze to the pensions Lifetime Allowance. Both have been frozen until April 2026.
While the majority of advisers (64%) believe affected clients are aware of the freeze, only 11% say their clients fully understand how the change will impact them. A third (32%) say affected clients are completely unaware of the changes.
To avoid the charge, 72% of advisers believe clients should increase lifetime gifting, while 37% anticipated greater use of Business Property Relief qualifying investments.
Nick Bird, head of strategic growth at Octopus Investments, says: “The freeze to inheritance tax thresholds, coupled with rising property prices, means more estates than ever are likely to face an inheritance tax bill. The good news is there is plenty clients can do to make sure this is not the legacy they leave behind.
“Increased lifetime gifting looks likely to be the biggest change made to financial planning following the IHT freeze announcement. The potential downside is that once the money has been gifted, it’s gone. Now that we’re all living longer, that balance between lifetime gifting and keeping enough to feel secure in our later years has become more difficult, and that’s why lots of advisers are also considering flexible planning solutions, such as BPR, as a more flexible tool to pass money through the generations.
“IHT is a complicated and often misunderstood tax and advisers have a real opportunity to add value to their clients, particularly where they might otherwise fail to recognise the need.”
Additionally, over two thirds (67%) of advisers whose clients will be affected by the lifetime allowance freeze say their clients are aware of the changes, but only 16% understand how they will be impacted.
Half (50%) of advisers anticipate that clients will have to redirect contributions into their spouse’s pension to prevent a charge, while 48% said they would advise clients to prioritise other long-term savings ahead of making new pension contributions.
Bird adds: “As pension wealth increases at a faster rate and contributions become increasingly restricted, more people are having to organise their pension affairs to negotiate a possible lifetime allowance charge.
“Advisers anticipate using a range of planning options in response, including tax efficient alternatives, once pension and ISA allowances are maxed out. We also know that pensions are increasingly being used as an estate planning tool. That’s another reason it can be useful to have another form of income in retirement, as it means you can delay drawing down on the pension pot, which can be passed down very efficiently.”