Recently the Chancellor, Sajid Javid, suggested that he had been thinking about getting rid of IHT.
Now before we all celebrate the death of death duties let’s remember that according to ONS, IHT is expected to bring in for the Government £5.3bn in 2019-2020 and so it is unrealistic to expect that the Government will be ok losing that figure! If it were scrapped it will no doubt be replaced by something else…..
But it got me thinking about the Suitability Reports and a possible missed opportunities for our members.
As an adviser you have a duty to discuss and discuss properly with your clients.
Let me give you an example here:
We all know that the personal Nil Rate Allowance is at present £325,000 per person and that the Additional Nil Rate Allowance/Residential Nil Rate Allowance is potentially £150,000 per person, right?
So a couple could potentially leave between them £950,000 to their children (as long as they own a main residential property that is) and this is assuming no debt.
That’s great then right?
Well not quite, let us assume that this couple has two children and have good old mirror wills (all to spouse on first death and all to children if second death) and that they have no debt and that they live in Surrey and their home is worth £750,000. One of them dies before the other and they leave everything to the survivor and then the survivor leaves everything to the children, all pretty standard so far.
Let us assume that person 1 has £400,000 in Death In Service and person 2 £300,000, plus they have personal pensions each of £250,000 and £325,000 respectively.
They have joint investments of £600,000 in ISAs.
So we have a couple with lots to leave to their children and possibly inefficient wills but then again, with the ability to use any unused Nil Rate Band from a spouse this makes the mirror will not quite as bad as it used to be and the fact that pensions can be inherited easily too would seem to suggest that as far as IHT goes, there really isn’t much of an issue. A total of £1,350,000 in non-pension assets plus £1,275,000 in pension assets.
That should give us an IHT liability of £400,000 and tax at 40% of £160,000. Not necessarily an alarming figure to pay!
But there are some things to be careful of:
- Are the Pension plans are inheritable, in that they have the latest freedoms regarding succession? Dependents may not be able to access them or if they can, quickly enough.
- The death in service payments are made free from IHT but if they die at different times then it is highly likely that one amount of DIS will have been paid into the second person’s estate and added to their potential liability.
- ISAs can’t be touched until Probate is granted and that won’t be possible until any IHT is paid first.
- You can’t sell the property until probate is received. (By the way technically children can’t live in the house until Probate is received either)
- Where can they get the £160,000 from then? Bridging loan? Well possibly but the interest rate could be high and there is never any guarantee that you can get a loan, so that’s a huge risk.
What could you as an adviser advise instead?
- Transfer the property value or some of it to the children? Well yes but then from IHT purposes that might be a gift with reservation if you live in it and the full value could be in the estate when someone dies. Also if you go into are it might fall foul of the “deprivation of assets” regulations.
- Transfer 50% to Damien, the favourite child who then lives with elderly parent.
- Transfer all the pensions to a new SIPP with full succession abilities? Yes this can help make sure that the pensions don’t add to the problem but would cost to do so.
- Set up a “Spousal Bypass Trust” for the DIS? This would remove that issue of on second death it adding to the IHT woes but it means that the survivor has to ask for loans to gain access to the money.
- Invest the ISAs in some sort of IHT investment to place the capital outside the estate but still enjoy any capital growth? Well, you have to lose a big chunk of your assets to do this (£400,000 in order to eliminate the £160,000 IHT bill)
- Invest the ISAs into farmland, or, more risky, into AIM shares which may also qualify.
- Or maybe go back to a less complicated time and recommend a joint life second death term assurance to cover the potential bill?
I know that many might think that protecting an IHT liability with a life policy is very outdated but compared to so many other options it is a simple and straightforward solution.
Now I know that the following objections will be raised (and all valid they are too):
- “It’s expensive as you get older”
- “There is no guarantee to get cover”
- “If you use term assurance is only goes typically to age 75, maybe 85”
- “Whole of Life is expensive, poor value for money and not guaranteed”
And I say yes to all of those but I have rarely seen a suitability report that deals with possible ways to reduce IHT for a client. All too often the notion of using life cover to mitigate this potential risk is not even covered.
Proper advice around IHT should always include the following:
- Use of Nil Rate Bands (x2)
- Use of Annual Allowance
- Use of gifts exemption
- Pension planning
- Life cover and gifting (Gift Inter Vivos anyone?)
Stick it on the file in the SR repory and one day they might just come back to you on this one.