In this article, I look at an issue that comes up fairly often in estate planning conversations. What can you do if a client has a substantial inheritance tax liability where gifting is an obvious option, but they just don’t want to give away a large sum of money?
There are several reasons why that might be the case. A client may have beneficiaries they consider are too young to inherit now, and may also consider trusts too expensive or complicated. They may be concerned about possible future care costs. They may worry they won’t live seven years. Or they may simply feel uncomfortable giving away a lot of money that’s taken a lifetime to build up.
In some cases, a financial adviser is able to show such a client, perhaps by use of cash flow modelling, that they can in fact comfortably afford to make lifetime gifts as part of their inheritance tax planning. But that won’t always be the case.
Olive thinks estate planning means giving up control of assets
Meet Olive. She is a retired civil servant in her mid-eighties, in good health and is very independent. Her late husband left her assets valued at just over £1.7 million, including a house worth £900,000, a large investment portfolio and some savings held in cash and fixed-term bonds. She has a defined benefit pension that covers her day-to-day expenses.
Olive meets with Ben, her financial adviser, who brings up the topic of estate planning. Olive understands that, without any planning, her estate will leave her beneficiaries with an inheritance tax bill. Nonetheless, she raises a number of objections when Ben runs through her options.
“What if I need it?” she asks when they talk about gifting. Olive also mentions that she has concerns about her daughter’s marriage, and is wary of her son-in-law getting some of her money if he and her daughter divorce.
Olive also has a potential desire to travel once the coronavirus pandemic is over. She says she’s never been a big traveller, and may in the end decide not to bother. But she would like to have the option.
The bottom line, Ben realises, is that Olive is a client who is determined to keep her options open. She wants to make the decisions about what happens with her money while she’s alive. And she wants to pass on as much of her estate as possible to her loved ones when she passes away.
Ben then suggests life insurance as an option to explore.
“All those medical questions? No thank you,” is Olive’s definitive reply.
Ben introduces Olive to Business Relief
At that, Ben mentions investing in shares expected to qualify for Business Relief (BR), which Olive could fund by selling some of the shares she inherited from her late husband. A BR-qualifying investment can be passed on free from inheritance tax on death, as long as it has been held for at least two years at that time. The investment would stay in Olive’s name, meaning she should be able to access some or all of the capital later on if she needed it.
For the first time in the conversation, Olive’s interest is piqued. This could be a way to pass more wealth to her beneficiaries while retaining control of it while she’s alive.
Ben also explains the risks of making a BR-qualifying investment. It would involve holding shares in one or more unquoted or AIM-listed trading businesses, and the value of her investment, as well as any income from it, could fall as well as rise. Olive would need to be comfortable that BR-qualifying investments are higher risk than more mainstream investments, and she may get back less than she invests.
In addition, Olive should bear in mind that HMRC assesses BR when the estate makes a claim after she has died. Entitlement to the relief will depend on any companies she invests in maintaining their BR-qualifying status such that they qualify at that time. Tax treatment will depend on personal circumstances, and rules could change in future.
Ben also makes clear that withdrawals can’t be guaranteed, as the shares of unquoted companies or those listed on the Alternative Investment Market (AIM) can be harder to sell than those on the London Stock Exchange’s main market. The share prices may also be more volatile.
Olive wants to know more
Olive agrees to take some literature, and she books a follow-up meeting. Like many estate planning decisions, this one may take a few conversations before Olive decides what she wants to do. But for the first time, she is actively engaging with the idea. That’s because she now realises estate planning doesn’t necessarily involve giving up control of assets or being assessed by doctors.
In a survey commissioned by Octopus in December 2019, 89% of advisers said their clients have become more mindful of retaining control of their assets compared to five years ago.1 Introducing a client to the idea of BR-qualifying investments can be a good way to show that estate planning does not have to mean giving up that control. Even when a client decides this type of investment is not for them, it can be a good way to unlock the wider estate planning conversation.
To find out more about BR-qualifying investments, as well as resources you can use to support your estate planning conversations, go here.
1Research was conducted by Vouched For via an online survey of 560 financial advisers.
We do not offer investment or tax advice.