Jonathan Simmons: Three adviser challenges in the ‘inheritance economy’

Jonathan Simmons looks at the three biggest challenges advisers face when dealing with the delicate subject of IHT

We are living in an ageing society. In the UK, it is estimated that 1.2% of the British population passes away each year. This equates to over 750,000 people per annum – and deaths are expected to rise over the next 10 years.

Unfortunately, the amount of inheritance tax (IHT) being paid by families is rising, often as a result of beneficiaries who are not advised. The Financial Times reported that the value of IHT receipts to HM Revenue & Customs last year was a massive £5.4bn and this number is expected to double by 2030 to more than £10bn.

This amount of intergenerational wealth transfers is unprecedented in UK history. Known as the ‘inheritance economy’,  it has created a once in a lifetime opportunity for financial advisers to participate in.

But what are the main hurdles advisers need to overcome to reduce wealth cascading outside of the client’s family?

1. Control & access

Firstly, there is a huge misconception that estate planning only involves setting up trusts or gifting inheritance. While these traditional solutions may work for some clients, they involve the client giving up control or access to their capital.

There are increasingly popular alternatives emerging that are tax-efficient and provide the client with flexibility and capital growth, without the client’s capital falling outside of the estate. One of the most effective is Business Relief (BR); a piece of government legislation offering IHT relief.

Investing in assets which qualify for BR such as British forestry, hotels and residential developments, or stocks on the AiM Index, will relieve any IHT liability in full after just two years, providing they are held at the time of death.

In contrast, gifts and trusts require seven years before they qualify for IHT relief.

For advisers who have clients whose financial circumstances are likely to change as they grow older and require long-term care, BR has the advantages of speed, control and an income stream to bequeath to their heirs.

2. It’s good to talk

There can sometimes be a real reluctance for families to discuss money and their longer-term plans with each other. Older generations may have a reluctance to discuss sensitive topics such as The ‘M’ Word (aka: money) with their spouse or children.

Here, financial advisers will have a crucial role to play in removing this taboo.

Advisers are uniquely positioned to deal with sensitive issues at a delicate point in their clients’ lives – such as in times of grief.

We often meet advisers who say they get push back from clients on this subject, so it becomes a bit of a taboo. On the other hand, perhaps it is the way the subject has been presented to them, rather than the subject itself.

Building meaningful relationships with your clients and their family is an effective method of preserving clients during the inheritance economy, as you handle their household finances and get to know their families. If the client has a spouse, arrange a meeting between the three of you in order to work through these details together.

3. Providing holistic inter-generational advice

What has become increasingly apparent to us is that no matter how good an adviser, they cannot offer a complete financial planning service on their own.

In most cases, clients will also need legal services for wills, Power of Attorney, probate and tax advisory services for end of life estate administration to facilitate the smooth transfer of wealth to their beneficiaries.

Remember: every client will have children, parents or grandparents, so who is advising them?

Offering a holistic service, whilst facilitating communication within the family can be what sets your approach apart from the competition and put you in the best position to advise a client’s other family members – transforming the role of the financial adviser into the family adviser.

Jonathan Simmons is senior marketing associate at Stellar Asset Management