Late estate planning could cost affluent families £12.3bn in ‘preventable’ IHT

Late estate planning could cost affluent families in the UK £12.3bn in ‘preventable’ inheritance tax (IHT) as pensions fall into scope of the tax, according to Octopus Investments.

Modelling by the Centre for Economics and Business Research found that households in the top decile of UK wealth that started estate planning at 50 and made use of available strategies could pass on an average of £397,000 more to their beneficiaries than those who began at 70.

When extrapolated across the UK, this totals an estimated £12.3bn when rules that will bring unused pension pots into the IHT regime come into force from April 2027.

Under current rules, the same shift in timing would result in those families passing on £258,000 more on average, or £7.9bn in total.

On average, UK adults believe that estate planning should start at 44.6 years of age.

However, advisers reported that their typical client engaged with estate planning at the age of 61.

Of those aged 45 to 49, 86 per cent had done no estate planning at all, while 70 per cent of people in their 50s were yet to engage.

“The biggest threat to a family’s legacy isn’t tax – it’s the conversation that gets postponed,” commented Octopus Investments head of retail investments, Kristy Barr.

“Most of the wealth lost to inheritance tax isn’t lost to bad planning. It’s lost to no planning, by families who genuinely meant to get round to it or people who simply didn’t realise they had an inheritance tax problem.”

The research highlighted the costs of delaying planning, with almost seven in 10 advisers having witnessed avoidable tax or family conflict due to estate planning starting too late.

Advisers said clients delay because they believe they are too young to start planning, feel apathetic, lack urgency, or find conversations about death and legacy difficult.

Octopus Investments argued that the April 2027 pension change created a ‘clear moment’ for families to revisit estate plans.

The report also highlighted a generational issue within the advice profession, with 81 per cent of advisers who handle estate planning beyond wills having been in the profession for 20 years or more, while just 5 per cent have between six and 10 years of experience.

As around half of the UK’s advisers are expected to retire within the next five years, Octopus Investments warned the country faced a potential shortage of specialised in the advice area where demand was rising the fastest.

“For years, many families were told to touch pensions last,” Barr stated. “That assumption must change.

“April 2027 will be remembered as the moment the inheritance tax conversation moved from late-life admin to mid-life essential. For advisers, this is a clear call to lead the conversation.

“The value of advice here is not just tax saved. It is family confidence, fewer difficult surprises, and plans that have enough time to work.

“The research also points to a growing opportunity for advisers to build relationships across generations.

“With only 55 per cent of advisers implementing intergenerational strategies to retain assets across different generations, those that do can help families keep more of what they’ve built, and help their own firms to build relationships that last beyond the initial wealth transfer.”

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