In this article, I’ve got a client scenario for you to chew over. Let’s look at how you might advise a client whose estate is above the £2 million RNRB taper threshold.
Julie is 81. She is widowed, with two children and four grandchildren. Her estate is worth a total of £2.8 million. Julie’s estate loses £1 of RNRB for every £2 by which it exceeds the taper threshold. If she were below the taper threshold, her total RNRB would be £350,000 (her own £175,000 allowance plus her late husband’s allowance which passed to her when he died). But as things stand, there would be no RNRB at all available to Julie’s estate.
Julie meets with her adviser to look at her estate planning options. As part of the discussion, they consider gifting as a way to reduce the value of the estate below the £2 million threshold. However, Julie is uncomfortable with the idea of giving away large sums, even though cash flow modelling suggests she can easily afford to and is highly unlikely to need all her assets during her lifetime.
What Julie’s adviser recommends instead
Julie’s reluctance to gift assets she could easily afford to is quite common. In December 2019, a survey commissioned by Octopus found that 89% of advisers surveyed said their clients have become more mindful, compared to five years ago, of potentially needing access to their money in later life. We hear the same thing anecdotally from many of the advisers we work with.
One way some advisers have responded is by recommending investments that qualify for Business Relief (BR), which have grown in popularity over the last decade. A BR-qualifying investment can be passed on free from inheritance tax once it’s been held for two years. The appeal for some clients is that the investment stays in their name, meaning they can sell it later on if they want to access the capital.
Before we go on, I want to draw your attention to two important points. The first is that there’s no free lunch here. BR-qualifying investments put capital at risk. The value of any investment, and any income from it, can fall as well as rise, and investors may not get back the full amount they put in.
The second is that, while access to capital is an attractive benefit, it’s relatively rare for clients to draw down BR-qualifying investments once they have made them. Making this type of investment can often help a client take the next step in estate planning, especially if they don’t want to use other strategies like gifting. Once they have, it’s common for a client to think of that investment as ‘belonging to’ their beneficiaries. It’s also much more efficient from an inheritance tax perspective to fund lifetime costs from other sources, which can help clients realise that they can in fact afford to gift some assets.
Being able to make immediate withdrawals from a BR-qualifying investment can never be guaranteed. Qualifying shares may be harder to sell than shares listed on the main market of the London Stock Exchange. Their value can also be more volatile.
Based on her objectives and attitude to risk, Julie’s adviser recommends she makes a £1 million BR-qualifying investment, which she is content to do.
Four years later, Julie feels happy to settle this investment into trust
While BR-qualifying investments that have been held for two years are zero-rated for inheritance tax, they still count as part of the estate when working out whether the RNRB taper threshold applies.
Four years later, at her review, Julie agrees with her adviser that she is now comfortable to relinquish ownership of some of her assets. Her adviser mentions that because she has held the investment for more than the two-year qualifying period, there would be no chargeable lifetime transfer if she settled the investment into a discretionary trust. Doing so would immediately bring the value of her estate below £2 million, allowing it to claim the full RNRB allowance.
By this point, Julie already thinks of those assets as being for her children and grandchildren. So she’s happy to settle the BR-qualifying investment into trust in order to free up her full RNRB allowance.
This is one example of how a conversation about BR-qualifying investments can help a client take the next step in their estate planning. As I noted earlier, though, BR-qualifying investments put capital at risk. Tax treatment depends on individual circumstances, and tax rules could change in future. Companies invested in need to maintain their BR-qualifying status.
Join us for The Octopus Online Show
Every month as part of The Octopus Online Show, my colleagues and I will be looking in more detail at how advisers can unlock more estate planning conversations. I hope you can join us. You’ll find full details at octopusinvestments.com/octopus-online-show.