by Siân Davies Cole
Although estate planning is one of the key areas requiring attention by financial planners, in times like these it might take a back seat while clients are more concerned with markets and their health.
When it comes to estate planning, the main consideration for the financial planner is understanding the client’s objectives and circumstances, especially income and capital needs as well as their existing arrangements. However, one thing that makes estate planning unique is ensuring that although clients may seem to have more wealth than they will need during their lives – restricting access to income or capital is a decision that should not be taken lightly.
The bottom line is if clients want to take action with estate planning, they should regardless of the markets or other external factors. As financial planners, we need to find out what our clients want client to make their estate more tax efficient.
When considering estate planning solutions, I normally work through several options to consider whether they are suitable for a particular case. I usually start with direct gifting, whole of life assurance, gifting into trusts, then consider investment solutions that provide nil rate band exemption through business relief.
In current times, I still consider all of these options, however I take into account some other specificities.
Gifting Directly Or With A Trust
With many being furloughed and others experiencing a reduced income, I believe parents will want to financially assist their children, hence an increased need for direct gifting. When a client is gifting directly to someone, I consider that the recipient may not have the same objective as the client. The recipient might spend the gift on things the client considers undesirable, and this is something I especially consider with child-to-parent gifts.
I make sure to think about how best the gifts my clients make can meet both their objectives and the needs of their recipients. Gifting into a trust would normally be the next consideration I would make, however, this is more of a long-term solution as opposed to a quick way to gift money during these unprecedented times.
Paying The Liability
Next, I’d consider arranging a whole of life cover to provide a lump sum on death to enable their executors to pay any Inheritance Tax bill due on their death. This remains a valid solution as a way of providing a means to pay the liability and gifting disposable income out of the estate on an ongoing basis. The main concern with protection applications now is that GP reports could become difficult to obtain again, as they were during the first phase of the pandemic when the NHS became overwhelmed.
In my experience, the underwriting often takes 6-8 weeks without any delays however completing an application form for this type of cover can be taxing, so while clients’ social calendars are less empty it might be the perfect time to get applications in, even if they are delayed.
Nil Rate Band Exemptions
There aren’t many ways to retain assets in a client’s estate and have them exempt from inheritance tax, however assets which qualify for business relief are tax-exempt after the qualifying period of 2 years. I’ve seen many solutions offer this tax-exemption over recent years, however it is a complex area with many considerations to be made. In essence, there are 3 options for the client to obtain this business relief tax exemption – Enterprise Investment Schemes (EIS), Alternative Investment Market (AIM) shares or capital preservation type schemes.
With qualifying assets having a tax-exemption period of only 2 years, these three options are for clients who are short on time and have an appetite for risk.
EIS are mainly for startup firms who carry a large risk of failure and loss. However, they might be appropriate for high earners due to the tax relief available. With the ability to offset losses and carry forward gains they are often more suitable for client with complex situations. Whether a gain is achieved on this type of investment will not be seen for a number of years. So an EIS could be an appropriate way to invest for potential gains as well as inheritance tax exemption.
Shares in AIM are traded in much the same way as any other listed shares which results in an investment experience very similar to a regular investment portfolio, although with slightly higher volatility than the FTSE100. The main benefit of AIM share portfolios is that they can be held within ISAs. They have the opportunity to grow free of inheritance tax, but the client must be able to stomach losses.
I consider capital preservation schemes for older investors. While they are high risk due to investing in an unlisted company, according to miCap.com they offer consistent returns of between 2 – 6%. This could offer a great solution in uncertain markets for clients that are looking for estate efficiency.
It is also important to note that after the qualifying period, some assets which qualify for business relief can be gifted and be immediately outside of the client’s estate.
The most important thing when it comes to estate planning is to do it. If a client has a need for estate planning and they are motivated to take action, we should consider solutions without delay.
Sian is a Chartered Paraplanner & Director for Plan Works – an outsourced paraplanning firm which she joined in September 2020. After many years in the industry, she specialises in more complex investment arrangements such as EIS, VCT and estate planning solutions. Sian worked in a number of IFA firms previous to this – most recently working as Head of Paraplanning where she put together the firm’s paraplanning team, advice processes and implemented the iO back office system as well as doing a bit of paraplanning too! Outside of work, she enjoys running and gardening and even organises Emma Bridgewater pottery sales in her local area when she’s feeling really bored!
The views expressed in this article are that of this author and do not necessarily reflect the views and opinions of Voyant.