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Home Business The clear need for effective estate planning to mitigate effects of another ‘nil-rate band freeze’

The clear need for effective estate planning to mitigate effects of another ‘nil-rate band freeze’

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By Jack Rose, Strategic Sales Director at Triple Point

In a bid to plug the £54 billion hole in public finances, Chancellor Jeremy Hunt announced plans earlier in November to extend the freeze in the inheritance tax (“IHT”) “nil-rate band” until 2027/28. This announcement followed the news that many families could be a risk of being overcharged inheritance tax due to falling real estate prices – HM Revenue and Customs (“HMRC”) calculates IHT on the value of the property at time of death, not at time of sale, which very well could go down – resulting in the tax owed being based on a higher valuation than it really should be. This is while inflationary pressures have pushed more households pass the limit of any allowances. 

The move, which is expected to cost British households an additional one-billion pounds in IHT expenditure, only serves to reinforce the pressing need for sound estate planning solutions that can hedge against market volatilities and changes in fiscal policy. Triple Point’s Estate Planning Service (“TPEPS”), is one solution to consider. 

Inflationary pressure on inheritance tax thresholds 

The decision to extend the freeze on inheritance tax nil-band rate will undoubtedly have a significant impact on British households. When taken with continued market headwinds, inflation and interest rate hikes included, the outlook for families’ finances is challenging to say the least.  

With inflation rates hovering above 10% and set to rise this winter, thousands of households have already been forced out of the current £325,000 nil-rate band which has remained the same since 2009. Should this band have risen in line with inflation, it would currently stand at £428,000. Extension of nil-rate band freeze, coupled with rising inflation rates, will push even more families above the threshold in the near future, causing revenue from IHT alone to surpass the £3.5 billion collected in 2021. 

Despite introducing a new transferable nil-rate band of £175,000 in 2017 to ease the burden on households, failure to increase overall nil-band rates in line with inflationary standards will push more families across the limit for inheritance tax especially as inflation rates continue to climb. 

The connection to property prices 

Property prices have fallen consistently over the last three months and are expected to fall by as much as 20 percent over the next year. Projected instability within the housing sector will see households receiving an inflated inheritance tax bill, as much as 15-percent more in IHT compared to the real value of their property. 

Inflationary pressures combined with instability seen in the property market presents a sizeable challenge for estates looking to mitigate increases in tax burdens. Forward-looking estate planning solutions that prioritize asset protection and diversification is more urgent than ever. 

Business relief as a forward-looking solution

Many strategies exist to reduce IHT due on estates. Business relief can be considered as it presents itself as an effective fix to burdensome tax bills, as it allows estates to claim relief on business assets owned, including shares in qualifying businesses. This form of tax relief reduces the value of business assets in an individual’s IHT liability. 

Available through owning shares in a qualifying company either unquoted or listed on the Alternative Investment Market, its benefits are two pronged: it firstly offers potential clients immediate inheritance tax relief without the risk of capital loss. Business assets which have been held for a minimum of two years before death can also be passed on without incurring inheritance taxes. Secondly, as it is an investment strategy, clients can potentially enjoy capital growth that can be passed on in through the estate.

Diversification in a business relief portfolio

Inherent risk associated with all investments is only amplified by current macroeconomic conditions. Diversification within an individual’s business relief portfolio is therefore crucial to mitigate against global and domestic economic challenges to provide families with long-term stability. Investors should look to diversify their business relief portfolio, putting money into a variety of sectors and asset classes. 

Triple Point, building on our expertise in the IHT business, have worked to develop a sector tool which enables investors to establish the levels of sector diversification offered by unlisted business relief providers. This tool allows groups to decide on the right business relief provider with greater precision, and gain greater control over which sectors they are invested in. 

With rising inflation rates and slumps in the housing market, many families will find themselves having to deal rising IHT bills while coping with the loss of a loved one. Business relief is a valuable IHT planning tool that can provide financial peace of mind particularly in an increasingly volatile economy while hedging against uncertain policy decisions. 


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