The raft of changes announced in the October 2024 Budget – particularly on tax – are boxing many clients into a corner, and advisers have an opportunity to look beyond the traditional estate planning routes to optimise outcomes for clients. Jon Prescott, partner at asset manager Praetura Investments, outlines the alternative routes that advisers can look to if they’re to boost tax efficiency.
Even before the raft of changes made by the Treasury since the government took power have really had time to make a meaningful impact, inheritance tax (IHT) receipts for April 2024 to March 2025 hit £8.2bn. This is a £0.8bn rise from the same period last year. This is partly why the perception of IHT being a preserve of the wealthy is fading fast. And with the government’s confirmation last month that pensions will enter the IHT net from April 2027, this trend is set to accelerate dramatically, bringing an estimated 49,000 additional estates into the IHT regime.
Then there are surging forecasts for income tax receipts, which rose by an additional £21bn over the forecast period (2024/25 to 2029/30) according to the Office for Budget Responsibility’s Economic and Fiscal Outlooks for October 2024 and March 2025. Meanwhile the OBR foresees the capital gains tax take inflated to £25.5bn in 2029-30 – a hefty 0.7% of GDP.
These shifting liabilities are exactly the sorts of challenges the Consumer Duty requires advisers to take note of and proactively address throughout the life of their client relationships. This is becoming harder to do through traditional routes of investing, particularly as pensions – long considered the cornerstone of tax-efficient estate planning – will lose their IHT exemption status in just over two years.
A diversified, balanced portfolio is more essential than ever, but what tools are at advisers’ disposal and how can they ensure they’re helping clients gain an edge in a competitive market?
The utility of tax efficient investing
The Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) have been around for 30 years and, despite an elevated risk profile that can sometimes be off-putting, have paid out billions in tax relief.
With pensions losing their IHT advantages, these schemes are likely to play an even more crucial role in advisers’ tax planning toolkits. They’re also not without risk mitigation from expert investment managers, who are unearthing high growth potential with underlying investee diversification.
At Praetura, for example, we have strong ties to businesses and opportunities in the North of the UK, offering geographical diversification, supporting the government’s drive for devolution of power to economically self-sufficient regions, distributing funding from the British Business Bank’s Northern Powerhouse Investment Fund II, and running an institutional mandate for the government.
The government clearly believes in the power of tax-efficient investing – the schemes’ sunset clauses were extended by the Chancellor last year. And while investing in vehicles requires patient capital and accepting the risk that investing in the UK’s brightest start-ups doesn’t always pay-off, it’s clear that EIS and VCT investments form an important part of a dynamic portfolio that have the power to deliver strong returns in the medium- to long-run.
Gifting and retaining control of assets
Business Relief (BR) is also becoming a more viable option for advisers looking to help clients manage their tax. The £1m BR cap announced alongside the pension changes makes it essential for advisers to consider it as part of a broader strategy rather than a standalone solution.
Gifting for estate decumulation can certainly be a helpful strategy, but once gifted, access to capital is lost. BR can offer a solution that retains access to funds and now it has a formal £1m allowance to use.
Despite being viewed as higher risk, BR shouldn’t be lumped in with EIS and VCT as it benefits from a much broader investment universe that means it’s not restricted to riskier, early-stage investees. That said, of course, risk profiles across BR manager strategies vary and advisers should understand the underlying asset classes of the trading companies. Savvy advisers will split cases across providers that can create true diversification.
To that end, recent research from Downing has revealed that clients are most likely to be using gifting (63%) or trusts (64%) to mitigate IHT but strikingly, but only 12% are using Business Relief plans. Given rising estate values and higher IHT bills, and the confirmed inclusion of pensions in estate valuations from 2027, there’s a strong argument that more clients should be diversifying into BR solutions alongside gifting and trusts.
Overlooked options like VCTs and EIS, gifting and BR could be advisers’ key to unlocking supercharged outcomes.
The perfect storm creates opportunity
The confluence of frozen tax thresholds, the pension IHT bombshell and the BR cap creates what might seem like a perfect storm for wealth preservation.
However, for advisers who act decisively, these changes present an opportunity to demonstrate real value. With the pension consultation now closed and the April 2027 changes confirmed, the two-year planning window is finite.
Those who explore beyond traditional strategies now, rather than waiting, will be best positioned to help their clients navigate these fundamental shifts in the tax landscape.