As the UK government is poised to raise taxes and maintain the freeze on the threshold under which people do not have to pay inheritance tax, Nick Ritchie, senior director of wealth planning at RBC Wealth Management, discusses with WealthBriefing how the uncertain economic environment is affecting wealth planning.
In an interview this month with WealthBriefing, Nick Ritchie from RBC highlighted how their clients cite personal tax and death duties as two of the greatest risks to preserving family wealth.
“Gifting, whether direct or via a structure to individuals or to charities, is one way to lessen the impact of death duties, but market uncertainty and high inflation is creating a hesitance,” he told WealthBriefing.
This is exacerbated by the expected tax rise included in the UK government’s package of budget measures this week, and a freeze on the threshold under which people do not have to pay IHT.
The threshold for paying inheritance tax of 40 per cent in the UK has currently been frozen at £325,000 ($364,000) since 2008/2009 until 2025/26. Gifting money seven years before an individual dies is one way to avoid this tax, as it is no longer part of the estate.
But given the uncertain economic backdrop, Ritchie said that some clients want to defer making a decision about gifting large proportions of their estate, as they are worried about losing control of their assets.
“Clients are seeing value in “stress testing” their finances to really understand “how much is enough” for their own needs, even in the most pessimistic of scenarios, so they can take a more informed approach to what they can afford to give away, when and how to do it,” he said.
Nevertheless, he is seeing a rise in targeted gifting. “Clients want to gift some of their money now to help children with their lifestyle expenses, affected by rising interest rates and high inflation. They want to help them cope with current challenges, like mortgage costs or paying grandchildren’s school fees,” he said.
The UK's inflation rate currently stands at 11.1 per cent, the highest level seen in 41 years.
The UK finance minister, aka Chancellor of the Exchequer, Jeremy Hunt, is slated to unveil a mix of tax hikes and public spending cuts today to tackle what is said to be a black hole in the UK public finances. The moves will, to a considerable extent, reverse the moves of the previous short-lived administration of Liz Truss and her Chancellor, Kwasi Kwarteng. Under Kwarteng, the government had reversed rises to corporation tax and rises to National Insurance. Debate continues on whether the Hunt "austerity" drive will backfire by making a possible recession more severe than otherwise, condemning the UK to a sort of "doom loop" of weaker activity, falling revenues and the need for more cuts to spending and more tax rises.
Ritchie also highlighted that where individuals decide to postpone making larger gifts for fear of giving away too much too soon, or losing control, they can insure their liability by taking out life insurance designed to cover death duties.
In the current inflationary environment, this is becoming an increasingly attractive option for clients wanting to retain access to greater sums of wealth to meet their own rising costs. With premiums on long-term policies linked to interest rates and gilt yields, pricing has become particularly attractive amid the rising rate environment, he said.
Among other potential moves today is a rise to capital gains tax. It has been argued that raising CGT tends to be self-defeating because people will simply postpone or reduce transactions to avoid falling into the CGT net. See here for a related commentary about "supply-side" tax policy.