Far too often in life, we are all guilty of leaving financial planning too late. “I wish I had started making pension contributions sooner”, or “I have been meaning to write a Will for some time”. These are comments we hear all the time from prospective clients.
A more familiar phrase in recent times is ‘Have I left it too late for inheritance tax planning?’. We appreciate inheritance tax (IHT) is not something that people get excited about discussing, but equally it is absolutely important they do. For those who do leave it to later life, their options reduce substantially, and will likely be more favourable to the chancellor than their beneficiaries.
For those well organised clients, they can consider several solutions such as gifting of assets, life cover or trust planning. However, if left too late the seven-year rule makes gifting less attractive and the ability to obtain cover at a competitive premium is reduced. They could consider trust planning which has the same gifting criteria to meet. However becoming a trustee later in life can bring its own set of complications, something clients would rather avoid at a time when simplicity is the key to managing their financial affairs.
So what else can they look at?
Business-relief qualifying investments
Unlike an Alternative Investment Market (AIM) portfolio, an alternative solution with a few providers allows investors to purchase shares via an unquoted trading company. This company then enters trading partnerships with several organisations, and it is this trading entity that often qualifies for business relief (BR), once held for a minimum of two years. As a reminder, business relief is taxed at 0% rate for IHT purposes (rather than 40%), but still remains an asset of their estate. As such, this provides the individual with ownership and control throughout the ownership period. Once held for two years, the intention is for the asset to be BR qualifying within the estate, therefore benefitting from the 0% tax rate applicable to that asset on death.
When considering the risk perspective, it is absolutely important to understand the client’s objectives. While many clients want to try and mitigate any IHT liability, importantly they also do not want to lose money (both capital loss and by way of inflation). For some of those older clients, we may not be considering a particularly long-term investment horizon, and therefore this needs to be accounted for when assessing a risk profile and making a recommendation. In most cases, we are probably looking to retain value in line with inflation, from a cautious risk profile, but of course each client has their own objectives.
An attractive investment for this client profile is to use one of the estate planning portfolios that are available in the marketplace. Typically the products we select to work with have large weightings towards asset backed investments such as infrastructure and energy projects, which typically are deemed lower risk than a comparative BR qualifying investment, such as a portfolio of AIM stocks.
These products aim to be BR qualifying, although investors are still subject to the two-year qualifying period attached with these investments, which could still be a concern for some. However, if passed to a spouse upon death the two-year clock does not re-start, so effectively only one of them needs to survive the period.
A further benefit available in some of these products is the ability for investors to access a group life policy. While there are criteria that need to be met, it is likely to be much less stringent than if we were to try and arrange individual cover for an 85-year-old, as the provider can spread the risk across the group life policy, rather than the single insured member. It should be added that there may be no underwriting required which makes the application process extremely simple.
As such, the big benefit is that the investment is IHT efficient from day one, as the life cover policy would provide an amount equivalent to the IHT liability, if death was to occur before the two-year qualifying period has ended. This means the total value of the investment can be passed to the beneficiaries. This can be a great option for some of those older clients who want to improve their IHT position but are running out of time.
These are just a few options from many that we could consider for IHT planning so please feel free to contact me if you would like to discuss further.