A New Era for Inheritance Tax: How One of Retirement Living’s Best-Kept Secrets Is Coming to the Fore

The Inheritance Tax (IHT) conversation has shifted exponentially in recent years, with both new and upcoming legislation changing the way you need to approach this topic with your clients. Strategic estate planning is now more urgent than ever to secure optimum wealth preservation for your clients’ beneficiaries.

Integrated Retirement Communities (IRCs) are increasingly coming to the fore in these conversations, offering not only an attractive later-life living option, but also an often-overlooked opportunity to mitigate IHT.

Demand for Inheritance Tax advice is surging in the face of a raft of new legislation

Previously announced changes will see most unused pension pots included in an estate for IHT purposes from April 2027. The latest Budget announcement included a freeze on IHT thresholds for a further year, to 2031, which could bring even more estates into the scope of IHT. Plus, the new High Value Council Tax Surcharge (HVCTS), known as the “mansion tax”, will come into effect from April 2028.

Under this new regime, properties valued above £2 million will be subject to an additional payment on a sliding scale starting at £2,500. Those valued above £7 million will face an annual £7,500 surcharge. This could make owning a high-value home less attractive to your clients, especially those living alone in their former family homes.

Meanwhile, the Financial Conduct Authority (FCA) has placed an increased focus on holistic advice, requiring advisors to look at every aspect of retirement and take into account changing circumstances over time.

As part of this wider remit for IHT advice and estate planning, some firms are also making it compulsory for advisors to talk about retirement living options with their clients. All this adds up to a new dynamic for the IHT landscape, making it more important than ever for advisors to broaden their approach.

Shifting the conversation from downsizing / rightsizing to “estate-sizing”

Extending the conversation means moving away from simply looking at cashflow modelling for downsizing. Increasingly, the rhetoric is changing to “estate-sizing” – essentially, finding an option that meets your clients’ lifestyle and financial requirements at that time.

Some of your clients will be adamant that they don’t want to leave their own home unless they’re absolutely forced, believing that they’ll be more independent and happier in their current home (not some funny place for old people). But it’s this misunderstanding that means they’re more likely to be isolated whilst having no concept of modern IRCs that provide amazing facilities for them to enjoy.

Further, their knowledge and understanding of support or care costs needs to be factored into their planning, and can be a real eye-opener, which advisors can help steer them through. According to Age UK:

– Private care in your own home can be around £25 an hour
– Residential care can be around £949 per week in a care home
– A nursing home could be £1,267 per week.

But the concept of being in their own (often not fit-for-purpose) home until they either pass away or are forced into expensive care paints a rather bleak picture of retirement.

IRCs can offer a rather more uplifting picture; a home that’s just right for them, with high-end amenities and facilities, and plenty of socialising opportunities and group activities. Plus, they offer a significant possibility in terms of IHT reduction. Many IRCs, including Riverstone Living, operate on a “deferred fee” model.

Under this system, after a resident passes away, a percentage of the sale price of their home is returned to the IRC. This fee is used for costs, including maintenance, facilities, communal amenities, and overall site upkeep.

This can initially be off-putting to your clients, or more precisely, their families, who may fear this will reduce their inheritance. However, the key is to educate them that, in fact, the deferred fee is not included in their estate for IHT purposes.

Effectively, purchasing a property in an IRC running this model removes a percentage (up to 35%) of the estate from the scope of IHT.

The deferred fee model could enable your clients to leave more of their wealth to loved ones

According to SunLife, 49% of people over 50 want to leave an inheritance when they’re gone. Removing the deferred fee from their estate will widen their opportunity to pass on more of their wealth to their loved ones, and reduce a potential IHT bill.

The shifting dynamic means that including IRCs in your later-life planning conversations with your clients not only fulfils your FCA obligations, but could also significantly benefit them from an estate planning perspective, too.

To find out more, see: https://www.riverstoneliving.com/advisors