HM Treasury postponing last year’s autumn budget might have caught many offside. Leading into the announcement, keen budget-browsers might have spotted the writing on the wall.
However, every action often creates a reaction which, if properly planned, can lead to a call to action where advisers have a prime opportunity to engage clients in matters of mitigation.
Here I’m referring to inheritance tax (IHT) planning and the best use of exemptions, allowances and reliefs.
The adage of, use them or lose them, is highly relevant. The potential point in play is that the boundaries of change have been pushed back until, maybe, mid-March 2021.
A window of opportunity exists for advisers to support clients to get their ‘IHT house’ in order, before the winds of change blow into our atmosphere.
The key driver is not just the financial implications of paying for the pandemic, but more to do with HM Treasury’s delayed response to the Office of Tax Simplification’s (OTS) review into IHT; Part II was published on 5 July 2019.
Interestingly, the All-Party Parliamentary Group for Inheritance and Intergenerational Fairness weighed in on this ‘debate’ by floating, perhaps, a more radical approach to IHT. Don’t forget against this backdrop IHT legislation and therefore planning, hasn’t largely changed in 40 years; hence ex-Chancellor Hammond’s request for the review, in January 2018.
The task can be made a little easier by using Canada Life’s Estate Planning Questionnaire (EPQ). This ‘IHT fact find’ has been specifically designed, to tease out the client’s overall financial situation, plus those important aspirations.
The EPQ generates a high-level strategy, where the adviser can shape thoughts towards an advice pattern, which can build out into a specific strategy to mitigate IHT exposure. EPQ’s scope covers:
- Personal details: value of main residence, second homes, outstanding liabilities, plus personal assets, or ‘chattels’.
- Investments: a breakdown of their ownership, plus AIM and EIS assets.
- Interests in trusts: targeted pre 2006 Interest in Possession trusts, plus bare/absolute trusts.
- Fundamentals of estate planning: covers components of domicile, residential property, future inheritances. Available nil rate band (NRB) transferrable and residential NRB (RNRB), plus prior gifting.
- Soft facts are equally important, here EPQ captures client aspirations.
- Wills, another important strand, if only to nudge clients to update them, so assets cascade in the desired direction.
Now to the analysis
Once completed, there is an option with the EPQ, through your account manager, if required, for Canada Life to support your IHT endeavours with the help of the technical team. This has been very beneficial to advisers who are not constantly active in the estate planning arena.
An analysis, at a high-level, can be provided that will only give a general steer in the direction of: liabilities, opportunities for use of allowances and relief’s, both during lifetime and on death. Here our compliance perspective is paramount. Naturally, there can be a fine line between suggestions and recommendations. The latter must not be trespassed as it is beyond Canada Life’s authorised remit but is supported with our usual disclaimers in place.
General steers are the correct direction of travel, for the journey that is IHT. The adviser is free to progress from a suggested high-level IHT strategy, to fine tune a specific advice pattern. This journey, depending on the value of the client’s estate could, under current legislation, take 7, 14 or 21 years.
The added value, of this high-level Canada Life approach, is underpinned by technical detail and related nuances, such as the concept of ‘gifting in the right order’. This is important to secure so that, as an example, tax on the tenth anniversary of a discretionary trust is not paid unnecessarily; always a good mantra. Or what about the impact of prior gifting? A failed potentially exempt transfer (PET) might create the dread of the 14-year shadow?.
EPQ outcomes provide a route map for the IHT journey along with prompts on issues requiring resolution with the client. This might highlight the need to put a joint life second death, whole of life policy in trust! Simple next steps keep clients committed to the route ahead.
Here is a flavour of the critical high-level opportunities regularly teased out by EPQ:
- Whole life, joint or single life, with a sum insured covering the starting IHT liability, written in trust, providing cash in the right hands at the right time to settle the IHT liability
- Seven-year level term policy, in trust, for a sum insured equal to the tax loss on chargeable lifetime transfers (CLTs), or PETs
- Gifting inter-vivos liability for substantial gifts exceeding the NRB
Use of the available lifetime NRB allowance
This is often driven by the need for access to income, plus using the allowance. However, where there is no dependency on the settlor ever requiring income, the only option would be a straightforward Discretionary Gift Trust. Otherwise, the choice of either a fixed income for life, using a Discretionary Discounted Gift Trust. Or variable income, offering options of deferral where required, in the form of a Flexible Reversionary Trust. In Canada Life parlance, this is the Wealth Preservation Trust.
Use of Exemptions
Similarly, deploying exemptions, is a must where available. It’s surprising how often these long-established mechanisms are overlooked. The two key elements, that should be regularly used, are:
- £3,000 Annual Exemption if not used elsewhere, or up to £6,000 if bought forward from the previous tax year. These values can be doubled for married couples, or civil partnerships.
- Normal Expenditure Out of Income Exemption (NEOI). This is highly useful for clients gifting a proportion of surplus income over expenditure, that doesn’t have to be substantial. NEOI, as a strategy, does present a great opportunity for more clients than many realise.
Beyond lifetime planning
To secure this suggested lifetime planning process, its essence must include valid, up to date wills, if only to knock out the rules of intestacy. Capturing the transferrable NRB and RNRB, where qualifying conditions are met, is also an imperative tactic.
All told, the objective of ‘journey’s end’ must be to: i) minimise the IHT liability, ii) cascade the outcome to intended beneficiaries, iii) prevent HM Treasury from being an unpalatable beneficiary.
Patrick Kennedy is tax and estate planning consultant at Canada Life