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Helping clients plan for inheritance tax in 2021

6 December 2020

For professional advisers and paraplanners only. Not to be relied upon by retail investors.

Christmas is often a trigger for discussions about a client’s estate. Jessica Franks, Head of Tax, Octopus Investments, looks at a potential, tax-efficient solution to those discussions. 

Inheritance tax affects thousands of families across the UK, but it’s a subject that can feel difficult to bring up at the dinner table.

If there’s one time of year that prompts discussions around inheritance, it’s Christmas. After a challenging 2020, there’s good reason to believe leaving a legacy has never been closer to the front of so many clients’ minds.

That’s why we’re hearing things like sky-rocketing enquiries for wills. According to deVere Group, these have increased by 76% since the start of the coronavirus outbreak.

So there’s reason to believe that in 2021, paraplanners could see an increase in demand for effective estate planning.

Unlocking the opportunity

Trillions of assets are set to pass down the generations over the next decade.1 However, with the amount that can be passed on free from inheritance tax (the nil-rate band) frozen at £325,000, more people than ever are set to face a potentially significant bill.

There is therefore large accumulated wealth and a huge need for advice. But starting the discussion is often the first hurdle in making the most of the opportunities.

This was one key issue addressed by Joe Sanders, Chartered Financial Planner at Informed Financial Planning, when he featured on a recent tax planning event hosted by Octopus.

“An honest conversation with the client can help,” says Joe. “Ask ‘what does your legacy mean to you’ and ‘who is it going to be passed down to’ and make it positive.

“Outline what their current liability against inheritance tax is and explain, in the future, with investment growth and income, how big that problem could get. If they can understand that, it is for them to understand the importance.”

Fear of lockdown

Once a client realises the extent of their potential liability and wants to do something about it, they may still object to inheritance tax planning.

Some don’t want to give up wealth in their lifetime, while others feel they’ve left it too late to do any planning at all. The biggest concern when it comes to estate planning is the fear of locking away money when it might still be needed.

Nine out of ten advisers (89%) surveyed in our research said their clients have become more mindful, compared to five years ago, of potentially needing access to money as they grow older.2

It’s an understandable concern. None of us know if health is going to become an issue for us. Sanders explains: “Some clients don’t feel confident they have enough to be comfortable in the type of care they want in later life. That fear of loss of control and access is a huge thing.”

As a result, most familiar estate planning solutions such as gifting and settling assets into a discretionary trust can be an immediate turn-off for clients.

Some also struggle with the concept of giving away wealth, and Sanders adds: “Some clients are worried the beneficiary may not do the right thing. So in terms of gifting, they just don’t feel comfortable doing it because they’re worried it won’t be used in the right way.”

Speed and access

So how might you overcome some of these client objections to estate planning?

Business Property Relief (BPR) offers an alternative to giving away assets, letting clients plan their legacy without losing access to their money.

Many clients may not have heard of it, but investments that qualify for BPR can be passed on free from inheritance tax upon the death of the investor, provided the shares have been owned for at least two years at that time.

While it won’t be right for every client, a BPR-qualifying investment can be a good option for those with large sums they need to plan for, but who are reluctant to do anything irreversible and happy to take on investment risk in return for the potential benefits of tax relief.

Because they are an investment, shares that qualify for BPR remain in the client’s name and can be sold at any time, provided there is liquidity. And so long as they qualify for relief when a claim is made, they achieve faster relief from inheritance tax than the seven years typical of lifetime gifts or trust planning.

This makes BPR-qualifying investments an important tool for advisers.

This is backed by researched commissioned by Octopus, which found more than half of advisers surveyed (60%) are recommending BPR-qualifying investments to some clients.2

Sanders finds it particularly useful for certain pockets of his client bank: “We often use BPR for lasting power of attorney cases, where gifting is difficult – if not impossible. It is also attractive for high net worth individuals, not just in the inheritance tax relief but also the investment opportunity for diversification.”

A note on the risks

Of course, the value of a BPR-qualifying investment, and any income from it, can fall as well as rise. As a result, investors may not get back the full amount they invest. The shares of unquoted or AIM-listed companies could fall or rise in value more than shares listed on the main market of the London Stock Exchange. They may also be harder to sell.

Tax relief depends on portfolio companies maintaining their qualifying status, tax treatment depends on individual circumstances and tax rules could change in the future.

Taking the next step

Clients may hear about BPR-qualifying investments in the media or from someone in their social circle.

These clients will welcome the depth of knowledge an adviser can bring, and Octopus is well placed to help you get to grips with both inheritance tax and investments that qualify for BPR.

By supporting estate planning conversations ahead of Christmas and the New Year, you can play an important part in giving your clients a positive start to what could be another uncertain time ahead.

Watch the Octopus online show on ‘Estate planning in 2021 and beyond’ to learn more about BPR and how we can support your business, at octopusinvestments.com/show/

Passing on the Pounds report, Kings Court Trust, February 2017.

Research conducted by Octopus and VouchedFor via an online survey of 560 financial advisers in December 2019.

BPR-qualifying investments are not suitable for everyone. Any recommendation should be based on a holistic review of your client’s financial situation, objectives and needs. We do not offer investment or tax advice. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: November 2020. CAM010490

Professional Paraplanner