The Surprising Inheritance Tax Benefits of Retirement Living

Estate planning – and Inheritance Tax (IHT) in particular – has been under the spotlight recently. With upcoming changes meaning that unused pension income will be included in the deceased’s estate for IHT purposes from April 2027, many of your clients will need to adjust their financial plans.

The chancellor has already frozen IHT thresholds until 2030, and it remains to be seen whether this freeze will be extended in the November Budget. For 2025/26, the nil-rate band is £325,000, with IHT applied at 40% above this amount.

As you’ll know, various scenarios, such as the death of a spouse, could raise an individual’s IHT threshold. Much of your strategic planning in this area may focus on lowering the value of a client’s estate to minimise their IHT liability.

With the FCA’s recent focus on retirement income advice and its expectations under Consumer Duty that advisors take a holistic approach, it’s crucial that you understand every option available to your clients.

Deferred fees can help to reduce an estate’s value for Inheritance Tax purposes

A lesser-known but advantageous aspect of independent retirement communities is that many include a “deferred fee” (DF) financial model.

These are charges applied when the resident moves out or after their death.

Different facilities will have different structures, but in general:
• Occupants will pay a slightly lower upfront cost, with the deferred fee then deducted from the resale value of the property.
• This fee is usually applied as a percentage – up to 35% of the property value – and is generally capped after a set period.
• Deferred fees cover the upkeep of communal areas, infrastructure, and building maintenance, and replace regular charges.

Your initial thought may be that this will be detrimental to your clients, as it will impact their capital. However, HMRC classifies this deferred fee as a deductible expense, thereby lowering the estate’s value for IHT purposes.

As an example:
Your client buys a retirement property for £700,000.

After their death, the property is sold for £1,000,000.

The deferred fee is 30%, which amounts to £300,000.

Therefore, the estate will receive £700,000 from the sale.

Essentially, this model removes £300,000 from the scope of IHT.

Thus with additional planning this could be put into a discounted gift trust (DGT) for example, assuming they have other funds, and gifted to their children, thus utilising the DF. As you talk to your clients about their estate planning, this is an example of a win-win scenario. Moving to an independent retirement community (IRC) allows them to maintain control over their lives.

From a wellbeing perspective, they will be part of a vibrant community, with high-end facilities, communal spaces, dining options, entertainment, and socialising opportunities.

Financially, the move will free up income, allowing them to make the most of their retirement. For advisors who work with clients and their children, there may be questions from the younger generation about how this could impact their inheritance.

Explaining that the deferred fee could lower their IHT bill – rather than reduce their likely inheritance – is often reassuring for the whole family.

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