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Estate planning for clients who worry it’s too late

Written by Jessica Franks
12 Jun 2020 Reading time: 4 mins

In this article I look at a piece of inheritance tax planning that can be effective for older clients who may feel they have left it too late for other approaches like gifting or life insurance.

So if you have older clients you need to speak to about their estate planning, read on.

Harold worries he’s left estate planning too late

Joan and Harold have just celebrated their platinum wedding anniversary (that’s 70 years, if you were wondering). Joan is 92 and Harold is 94. Most of their assets are in Harold’s name, with Joan his sole beneficiary.

The wedding anniversary prompts Harold to realise he probably hasn’t done as much financial planning as he ought to have done. He and Joan are not getting any younger, and they would like to leave something for their two children and five grandchildren.

So when the couple’s adviser, Laurence, suggests scheduling a call to review their investments and possibly look at some estate planning options, Harold readily agrees. During the call, Laurence tells Harold that, even after the recent market volatility, he and Joan have over half a million pounds on which inheritance tax would need to be paid were they both to pass away without doing any planning for it.

Harold is concerned that neither he nor Joan may survive the seven years necessary to get the full benefit from gifting. Life insurance is not a realistic option because of their ages.

Harold’s adviser introduces him to Business Relief

Laurence suggests Harold thinks about making an investment that qualifies for Business Relief (BR), a longstanding relief from inheritance tax. He explains that this would involve holding shares in one or more trading businesses expected to qualify for BR. Harold’s capital would be at risk, and he may not get back the full amount he invests.

If Harold survives for two years after making the investment and continues to hold the shares until he passes away, they would be expected to qualify for BR. That means he should be able to leave them to any beneficiary free from inheritance tax when he dies.

On the other hand, if Harold dies within two years and is survived by Joan, the shares can pass to her as his spouse without the need to pay any inheritance tax. She would then continue the two-year clock and only need to survive until the two-year anniversary of Harold making the investment for the shares to be zero-rated for inheritance tax.

In other words, so long as one spouse survives two years, the estate will save on inheritance tax.

Laurence explains to Harold that HMRC assesses claims for BR when they are made by the estate after someone’s death. There is no advance assurance that a company will qualify and tax rules could change. Tax treatment also depends on personal circumstances.

Laurence also explains that BR-qualifying shares can be more volatile than the shares of companies listed on the main market of the London Stock Exchange. They may also be harder to sell.

To help Harold get a better understanding of how this type of investment works, Laurence sends him a link to this Business Relief explained video. They agree a follow up call for a week’s time.

On their next call, Laurence discusses the potential for Harold to make a BR-qualifying investment. He makes clear there are some scenarios in which Harold and Joan’s beneficiaries could be worse off than if Harold continues to own his current portfolio. For example, if neither of them survives two years and the portfolio performs worse than his existing investment does over the same time frame.

If at least one of Harold or Joan survives for two years, then the couple should expect to be able to leave the BR-qualifying shares to their loved ones without this leading to an inheritance tax bill.

Harold is happy to take on the risk of holding shares in a BR-qualifying business so that his and Joan’s estate might benefit from BR. Laurence sends him a brochure for an investment that targets a steady, predictable return as Harold is not looking to target higher levels of investment growth, and they agree a follow up call once Harold has had a chance to read it.

Practical support for speaking to older clients (including virtually)

At Octopus, we continue to help older clients aim to pass on more to their beneficiaries by investing in BR-qualifying investments. We understand that these conversations are not always as straightforward as the one between Harold and Laurence, especially during the current period when face-to-face meetings are impossible. That’s why we’ve written this blog about how you can make digital meetings feel like face-to-face (or as close as possible).

We’ve also created a useful guide to making video calls that you can share with clients. To get a copy, get in touch with your Octopus business development manager.

BR-qualifying investments are not suitable for everyone. Any recommendation should be based on a holistic review of a client’s financial situation, objectives and needs. We do not offer investment or tax advice.