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Carol hadn’t come across this option before. It changed her perception of estate planning.
Let’s consider a common hiccup encountered in estate planning conversations. You have a client with a substantial inheritance tax liability. Gifting is an obvious option. But they just don’t want to give away a large sum of money.
There are several reasons why that might be the case. A client may feel their beneficiaries are too young to inherit now, and consider trusts too expensive or complicated. They may be concerned about possible future care costs. They may worry they won’t live seven years. Or, as is often the case, they may simply feel uncomfortable giving away assets they’ve spent a lifetime building up.
In some cases, a client will come round to the idea when their financial adviser is able to show that they can in fact comfortably afford to make lifetime gifts as part of their inheritance tax planning. But that isn’t always be the case.
Carol thinks estate planning means giving up control of assets
Meet Carol. She’s in her mid-eighties, in good health and is very independent. Her late husband left significant assets to her, including a house, a large investment portfolio and some savings held in cash and fixed-term bonds. She has a defined benefit pension that covers her day-to-day expenses.
Carol meets with Benjamin, her financial adviser, to discuss estate planning. She understands that the size of her £1.5 million estate means that when her grandchildren inherit, they’ll need to pay an inheritance tax bill.
Carol makes it clear that she likes the idea of planning for inheritance tax. Nonetheless, she raises a number of objections when Benjamin runs through her options.
“What if I need it?” she asks when they talk about gifting. Carol cites unexpected care fees and a desire to travel once the coronavirus pandemic is over as two possibilities. She says she would like to have the option.
Carol also mentions that she has concerns about her grandchildren inheriting while they are young.
Benjamin realises that Carol is a client who is determined to keep her options open. She wants to make the decisions about what happens with her money while she’s alive. And she wants to pass on as much of her estate as possible to her loved ones when she passes away.
He then suggests life insurance as an option to explore.
“All those medical questions? No thank you.” Says Carol.
Benjamin introduces Carol to Business Property Relief
Benjamin mentions investing in shares expected to qualify for Business Property Relief (BPR), which Carol could fund by selling some of the shares she inherited from her late husband. A BPR-qualifying investment can be passed on free from inheritance tax on death, as long as it has been held for at least two years at that time. The investment would stay in Carol’s name, meaning she should be able to access some or all of the capital later on if she needed it, subject to liquidity.
For the first time in the conversation, Carol’s interest is piqued. This could be a way to pass more wealth to her beneficiaries while retaining control of it while she’s alive.
Benjamin also explains the risks of making a BPR-qualifying investment. It would involve holding shares in one or more unquoted or AIM-listed trading businesses. The value of her investment, as well as any income from it, could fall as well as rise. Carol would need to be comfortable that BPR-qualifying investments are higher risk than more mainstream investments, and she may get back less than she invests.
In addition, Carol should bear in mind that HMRC assesses BPR when the estate makes a claim after an investor has died. Entitlement to the relief will depend on any companies she invests in maintaining their BPR-qualifying status. Tax treatment will depend on her personal circumstances, and rules could change in future.
Benjamin makes clear that whilst access is a potential benefit of BPR-qualifying investments, withdrawals can’t be guaranteed, as the shares of unquoted companies or those listed on the Alternative Investment Market (AIM) can be harder to sell than those on the London Stock Exchange’s main market. The share prices may also be more volatile.
Carol wants to know more
Carol realises for the first time that estate planning doesn’t necessarily involve giving up control of her assets. She agrees to take some literature, and she books a follow-up meeting.
For many clients, losing control of their assets is a barrier to putting planning in place. In a survey commissioned by Octopus in December 2019, 89% of advisers said their clients have become more mindful of retaining control of their assets compared to five years ago.1
So if you have a client like Carol or would like to find out more, watch our video here.
1Research was conducted by Vouched For via an online survey of 560 financial advisers.
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: July 2020. CAM009944.