As house prices remain sky high, insurers must acknowledge and act on the link between property value and Inheritance Tax to pre-empt future threshold rises, writes Ian Noble
Nobody working in financial services can have failed to notice that the housing market is doing rather well at the moment. Certainly, anybody who owns or has tried to buy a house will not have failed to spot that prices are currently, in the classic phrase, going through the roof.
However, not too many people working in financial services have spotted the connection between soaring house prices and the less than rocketing whole of life (WOL) market. There is a strong connection between the two, and it is one that will emerge more fully over the coming years.
It is not too bold a claim to say that WOL insurance, as a concept, is due for a revival and that the booming housing market is the key to that.
At the end of May, the average house price was £196,893, according to Halifax. House price growth in May was 0.3% and the annualised growth rate was 10.6%. Halifax expects house price inflation to moderate throughout 2007 as recent Bank of England rate rises take effect.
However, the outlook for the housing market remains buoyant as the UK economy continues to grow at around 2.9% and unemployment remains low. In any case, the crucial fact to remember is that average house prices are close to, and likely to remain around, the £200,000 mark.
House prices are vital to the debate about the future of WOL cover because of the massive role that house values play when it comes to Inheritance Tax (IHT). Soaring house prices mean more and more people are included in the increasing proportion of the population who are liable to pay IHT.
IHT is no longer a concern only for multi-millionaires and land owners. It is not just royalty, the landed gentry and premiership footballers who have to concern themselves with IHT planning. Because of rising house prices, IHT should be a concern for people earning relatively modest salaries.
Again, Halifax analysis shows what is happening with house prices and IHT. Its research estimates that, in 2006, a record £3.5bn was paid in IHT on estates up by 12% or £375m on 2005. Halifax estimates that, in the five years to 2007/08, a total of £16.4bn will have been paid in IHT. That is 50% higher than the £10.8bn paid in the previous five years. The Government itself estimates that, in the 2007/08 tax year, it will raise £4.1bn from IHT.
It is undeniable that IHT is a major revenue generator for the Government and it can be argued that the tax raised so far is just the beginning. Bearing in mind that the average house is worth at least £200,000, it is easy to understand what is coming.
The IHT threshold is currently £300,000 - rising to £325,000 in 2009/10. Anyone leaving an estate worth more than £285,000 pays IHT at 40% on the surplus. With average house prices of £200,000 someone only needs an extra £100,000 in assets to be caught by IHT.
And, of course, £200,000 is only the average house price. Halifax research shows that, currently, around 2.3 million houses in the UK (12%) are valued at more than £300,000. That is 2.3 million households with an IHT liability already. The rate of house price inflation is easily outstripping the rate of growth in the IHT threshold. In 2001, just 1.3 million houses were valued at more than the IHT threshold.
Halifax estimates that, by 2020, 4.3 million properties could be liable for IHT - assuming that the Government only increases the IHT threshold in line with inflation and house price inflation continues.
This is the context in which Lincoln Financial Group recently conducted research to find out about attitudes to inheritance and IHT. The findings are sobering and, in fact, rather alarming.
More than 7.4 million people are trusting in inheritances to fund future financial plans. Around one in six adults is relying on a windfall in order to sort out their finances, including paying off unsecured debts.
The research shows the average windfall from an inheritance in the past three years is around £40,430. That is a tidy sum, but more than a million people have received windfalls of more than £100,000, with around 74,000 picking up between £300,000 and £500,000.
This all seems like good news and, indeed, an opportunity for financial advisers. People with sudden windfalls need help with how best to invest the money and financial advisers are the right people to be doing that.
It is, in fact, a massive opportunity for financial advisers but an opportunity for more than advice on investments. It is an opportunity to provide an all-round holistic service that looks at the whole picture.
Research shows the majority of people receiving an inheritance use the money to pay off mortgages or for investments. However, around 518,000 use the money to clear unsecured debts.
Around 8% of those who have received inheritances in the past three years have used them mainly to clear debts, while another 14% have used the windfalls for new cars and holidays.
Relying on an inheritance to sort out someone's finances is, of course, not sensible financial planning. People need to be thinking about how they will handle the inheritance they receive and also how they should maximise the inheritance they can leave.
People should seek advice from financial advisers on financial planning and think through saving and investment plans. Advisers are well aware that there are many things that can be done to reduce any potential IHT bill but that specialist advice is needed.
One way of solving this, is by using a WOL policy, written in trust to pay the tax bill. Many advisers could be forgiven for thinking that WOL had died. However, reports of the death of WOL are much exaggerated. The sales figures may not paint a pretty picture, however. Swiss Re's Term & Health Watch 2006 shows a decline in sales to an all-time low of 205,532 in 2005 from 219,927 in 2004.
But that is not the whole story and there is new life in WOL thanks, in part, to a combination of IHT and the new Prime Minister and former Chancellor, Gordon Brown. Financial advisers can also play their part in what will be an interesting year. The boom time of the mid-90s when term assurance sales suffered may not be coming back, but WOL has reasons to be cheerful.
The Chancellor's U-turn on pension term assurance and tax relief means financial advisers will need to find other protection products to recommend to clients. Financial advisers, with their focus on holistic advice to clients, are the ideal channel for selling WOL as they can educate clients on the best approach to financial planning and lifestyle protection.
However, IHT and its effects remain the biggest boost for WOL. Financial advisers need to promote themselves as specialists in IHT planning and WOL fits well in this scenario.
The key benefit for WOL in IHT planning is that it delivers a lump-sum payment that will cover the IHT payment due on an estate. If the policy is written in the appropriate trust then the death benefit will be outside the estate for IHT purposes and can be paid out without waiting for probate. The estate can be settled without delay.
WOL has been in the doldrums for at least a decade, but the time is right for a comeback. The advantages for financial advisers of WOL are two-fold. It delivers a solution that should be popular with clients who will increasingly be looking for help with IHT planning and it will also deliver for financial advisers and their business development.
IHT is set to be one of the major issues of the next few years as the house price boom continues to set the agenda throughout the country. Where there is IHT, there should also be WOL. And that ought to add up to increased business for financial advisers.
Ian Noble is head of life sales and marketing at Lincoln Financial Group
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