The pandemic has wreaked havoc on health, family life and the economy amongst other things, and individuals could be forgiven for thinking that any IHT liability has been wiped out due to stock market and property values.
However, despite the turmoil, now is the very time to be discussing later-life and legacy planning with clients, as coronavirus has brought client’s and their family’s mortality into sharp focus. Indeed, advisers have reported an increase in requests to discuss wills, LPAs and estate/IHT planning.
IHT continues to be one of the most controversial taxes, even though it represents less than 1% of total tax receipts, at £5.1bn in 2019/20, according to the Office for Budget Responsibility (marginally down on 2018/19’s all-time high of £5.3bn). More estates (c.5%) are paying more IHT (c.£200k average) and receipts are forecast to rise to £7.1bn by 2024/25 to combat a £575m IHT gap.
The OTS IHT review is looking at ‘Simplifying the design of the tax’, but little has happened yet, although there are many recommendations from many organisations/thinktanks/groups, with suggestions ranging from:
- how IHT (and CGT) should be increased to help pay for the pandemic;
- introducing a wealth tax and changes to business relief;
- scrapping nil-rate bands (especially residence) and introducing a 10% tax on gifts and pensions;
- changing exemptions/reliefs or removing the CGT exemption on death (potentially making property taxable);
- making changes to the gifting/taper relief period and the relevant property regime, via the Trust Simplification review;
- reducing payment timescales and increasing anti-avoidance measures or investigations.
In reality, something radical would need to happen to substantially increase IHT receipts and although not clear what that could be, one thing’s for sure, IHT isn’t going away! Whilst any recession could mean lower property and stock market values, they will recover at some point and whilst some assets could fall lower, they will not all behave the same – we’ve seen a rebound since March – and there will inevitably be winners.
As far as property is concerned. there is a deficit in housing supply in the UK, which will remain, and so any reduction in house prices is likely to be less severe or sustained, than perhaps commercial retail property or student buy-to-lets. As residential property makes up a significant part of many estates, many will remain well above the available nil rate bands, so will require IHT planning advice.
With reduced asset values, gifting now may be an efficient way to pass on assets, so that the beneficiary can enjoy any future asset growth. At the time the gift is made, any gain in value by the donor is potentially subject to CGT, but if asset values are lower than before the pandemic, the possible CGT or IHT charge (if the donor dies within seven years of the gift, it will be treated as a failed PET or CLT) will be less.
There are many tried and tested planning approaches for gifting of assets, ranging from making outright gifts, the use of discretionary gift/loan trusts or business relief investments. However, clients don’t always like gifting – due to loss of control and access to capital, market volatility and ongoing management of a trust – which may all be more prevalent in the current climate and therefore the use of protection should be considered.
With increased focus on mortality – now seen as an unknown timescale, rather than an assumption it will be in your 80s – many people will be thinking about how they can protect themselves, their family and their estate. Many adviser firms have seen an increase in enquiries for whole-of-life (WOL) to cover the IHT liability, but perhaps most importantly, it provides cover from day one, compared to the two-year qualifying period for business relief investments or seven-year rule for outright gifting.
Existing conversations around protection have also gained a greater sense of urgency for clients who are keen to lock-in premiums at current age, health and rates, plus make use of IHT allowances/exemptions before any review.
Whilst medical evidence may be required, most lives can be offered cover immediately, and only those where more detailed health information is required, or who are above non-medical limits, will take longer. Some, like Zurich, also provide free cover during underwriting, of up to £1m for IHT planning – which can further remove any concerns during underwriting.
One objection is often around the affordability of WOL premiums, but the Zurich WOL calculator can help demonstrate the value the sum assured is adding over and above the premiums. Of course, if the WOL premiums are too expensive, then why not consider the forgotten option…..
Convertible term (CT)
The conversion option is available with some insurers’ term insurance policies, yet most clients are unaware, or advisers have forgotten about it. The option is added at the outset of the application for level or increasing life cover only and allows the client to choose to convert all, or part, of their sum assured to a WOL policy with the same insurer at any time (or multiple times) before the end of the policy term, without any medical questions or underwriting – effectively guaranteeing their future insurability.
This could be particularly pertinent in the current environment, as it also offers a cost-effective alternative to higher WOL premiums. Requesting CT quotes alongside WOL, gives you and the client a fall-back option – the client gets the cover they need at a more affordable cost and you get the business – whilst future-proofing them and their family. It may be the difference between them affording/having cover now and not. Here is an indication of comparative monthly premiums:
Full conversion to WOL at age 70, would on current rates cost £338.63pm (Zurich quote 15/07/20) and whilst significantly more, the client may then be in a better financial position to afford it and could be considerably less than the premium based on their actual health. One way of making the new premium more palatable, could be to demonstrate the saving they are making between a WOL and CT policy (see table above).
The use of the option within the term – as long as you remember they have it – provides control and flexibility as clients circumstances and regulation/taxation change, by phasing the conversion at different ages and for different sum assureds (up to the original sum assured under the term policy). Spending time explaining the flexibility and guaranteed insurability this option provides your clients with for the future, could be very valuable.
As an industry, not only must we support clients through the current difficult times, but as an adviser, you must also continue to look forward for clients, by helping them and their families plan for the future. Despite the pandemic and economic conditions, many clients will still have IHT liabilities, some may even have increased. Whilst gifting has its place, many clients won’t want to lose access or control and want full cover from day one, which is where the use of protection – WOL or CT – can provide your clients with planning solutions to cover the liability (including future increases) and lock-in premiums.
Client conversations should emphasize the peace of mind and reassurance this provides the client and their family, together with the flexibility and guaranteed insurability that convertible term provides them in the future.
Andy Woollon is retail specialist presenter at Zurich