This guide explains the effect that the pandemic had on estate planning, as well as the ways that those services could help investors mitigate inheritance tax
The Covid-19 pandemic, which started in early 2020, caused many people to reevaluate their lives. Some moved to different parts of the country to be closer to family, while others took on a new job or career.
Against this backdrop, many Britons also began looking more closely at their finances and thinking about their future legacy. Financial advisers say there has been a rise in clients seeking estate planning services as they consider the impact of inheritance tax.
Below, we outline how estate planning can help when it comes to mitigating inheritance tax.
Estate planning means putting together a plan of how you’d like your assets to be distributed after death. It involves creating a will and setting out your funeral wishes.
Estate planning can also help you mitigate inheritance tax that may be liable on your assets. In the UK, inheritance tax (IHT) is charged at 40% on estates worth more than £325,000. If you own a home, you get a further allowance of £175,000 (as long as you leave the home to your children or grandchildren). This is called the main residence nil-rate band. Spouses can transfer their allowance to each other after death, meaning IHT may only be due on assets worth more than £1m.
However, if your estate is worth more than £2m, the main residence nil-rate band begins tapering down by £1 for every £2. Effectively, once your estate hits a value of £2.4m you lose the main residence nil-rate band and a couple only has a joint allowance of £650,000.
Tax can therefore have a significant impact on your total wealth, and this is where estate planning can help. A financial adviser will look at ways you can distribute or invest your assets in a way that aims to reduce your inheritance tax bill.
The immediate impact of the coronavirus pandemic was that some people accelerated preparations for inheritance due to the associated health concerns. And while death numbers have fallen dramatically since the vaccine was introduced in December 2020, financial advisers say clients are more conscious of their own mortality. It is now a priority of many clients to discuss passing on their wealth and assets to their children and grandchildren.
At the same time, there may be more assets to pass on. While the coronavirus pandemic hit the UK economy hard, some people found their individual wealth increased due to lifestyle changes such as reduced commuting costs. Households’ savings ratio hit a record high of 29.1% in 2020, according to figures from the Office for National Statistics. Rising property prices have also boosted households’ wealth, meaning more people may become liable for inheritance tax. House prices surged by 10.8% in 2021, according to the ONS. A record of almost 690,000 homes in Britain are now worth more than £1m, according to data from estate agency Savills.
Meanwhile, some investors have found the value of their investments has soared. Although stock markets have experienced volatility from the pandemic and Russia’s invasion of Ukraine, investments in certain sectors have performed well. Sectors that have performed well include technology and renewable energy as countries seek to reduce their reliance on fossil fuels.
Estate planning services offer ways to reduce the burden of inheritance tax*, and one option is to invest in companies that qualify for Business Relief (formerly called Business Property Relief).
Providing certain qualifying criteria is met, these investments can benefit from up to 100% inheritance tax relief.
Estate planning services invest in a broad range of industries such as property, lending and energy to boost diversification across a portfolio.
The UK government has a target of reaching net-zero by 2050, which means the majority of our energy will be powered by renewables.
To achieve net-zero, we need to boost the amount of clean energy we are producing and the government is investing huge amounts of money to help achieve this.
Rising oil prices and the Russia/Ukraine conflict have also boosted renewable energy investments globally, as nations seek to move away from their dependence on fossil fuels provided by other countries.
There are a couple of ways that investing in renewable energy can reduce your inheritance tax bill.
If you invest in a company that qualifies for Business Relief, this investment will not be subject to inheritance tax, provided you have held the investment for at least two years at the time of your death.
Regular dividend income you receive through investments eligible for Business Relief could be redistributed to loved ones during your lifetime. The seven-year rule does not apply to gifts made out of qualifying income.
The ProVen Estate Planning Service, working in partnership with renewables specialist Armstrong Capital, invests in renewable energy infrastructure expected to qualify for Business Relief. We pay quarterly dividend income of around 5% a year to investors, offering the opportunity for regular income as well as capital growth**.
Financial advisers say there has been an increase in clients wanting to give away surplus income to their children since the start of the Covid-19 pandemic.
The balance of making gifts and knowing how much you’ll need to live on can be challenging. None of us knows what is around the corner and what our future will hold.
Financial advisers will take a holistic approach, considering all elements of risk to come up with a plan you are happy with.
First, a client should feel secure that they have enough money to live on comfortably should they have a long retirement. Second, they should feel confident their income can keep pace with rising living costs and potential soaring inflation.
After this point has been reached, clients may feel comfortable giving funds away to family members that may have a more pressing need for the money.
ProVen, managed by Beringea, is one of the UK’s leading providers of tax-efficient investment opportunities - managing more than £300m on behalf of around 10,000 retail investors. Armstrong Capital, a leader in equity and debt funding of UK based solar projects and other energy businesses, leads the solar strategy of the ProVen Estate Planning Service. Please contact your financial adviser to find out more, or call us on 020 7845 7820
* Remember, when investing, capital is at risk. Investments into private companies involve risk and the value of your investment may go down as well as up. Also, UK tax rules and regulations are subject to change, and such changes may be retrospective. Your ability to obtain tax reliefs will depend on your personal circumstances.
** This is a target and not a guarantee. Past performance is not a reliable indicator of future results.
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Find out more about the ProVen VCTs’ annual shareholder event, which featured insights from Beringea, the investment manager, the boards of the two funds, as well as several of the companies from the portfolio
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