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Asset aside

In simple terms, estate planning is ensuring that when a client dies their assets pass on to their intended beneficiaries but while this is simple in theory, there are, in practice, a number of complications.

Aside from accumulating sufficient assets to be able to pass them on as an inheritance in first place, clients have to ensure they have sufficient funds to be able to live out their lives in comfort.

Setting a realistic and sustainable income in retirement involves careful planning, not least because of the effect of increasing longevity.

Informed Choice joint managing director Martin Bamford says: “In terms of giving capital away to reduce any IHT liability, it can be a problem because you need to decide how much will be needed in retirement.”

One option to help preserve capital in retirement and ensure there are assets to pass on as an inheritance is the growing number of third-way retirement products.

The new drawdown products on offer from Hartford Life, Met Life and Living Time all offer a guaranteed income in retirement, but, unlike an annuity, offer some possibility of capital return on death, as does Five for Life, the offshore bond version from Aegon.

Bamford says there may be benefits from these products but says so far take-up from advisers has been slow as people wait and see if they deliver what they claim to be able to.

Despite the negative perception of IHT, it still affects only a small proportion of UK households. Figures from Halifax show that only 33,000 estates paid any IHT in 2006-07 but, with a 40 per cent tax rate for all assets over the nil-rate band, the impact for estates that do pay the tax can be steep and the Government raised 3.6bn from IHT in 2006-07.

There are some relatively simple measures that can make estate planning more straightforward. Writing a will is a very cost-effective way of ensuring that assets are directed according to a client’s wishes and writing life insurance policies is trust is also a cost-effective way of mitigating IHT.

The good news on the IHT front is that the Govern-ment has decided to allow both nil-rate bands for a married couple, or civil partnership, to be exercised on the second death. In the pre-Budget report last year, Chancellor Alistair Darling said: “This will enable all married couples and civil partners to automatically benefit from double the tax-free allowance in addition to their existing entitlement to full spouse relief. This measure will also be extended to all widows, widowers and bereaved civil partners.

The married couple’s and civil partners’ allowance now stands at 600,000 for this year and will rise to 700,000 in April 2010.”

This is not quite the doubling of the nil-rate band that the Government presented it as, because it has always been possible to claim on both nil-rate bands by the use of a will trust, but it does make this process much more straightforward and ensures everyone will benefit, not just those who have planned ahead. chartered financial planner Ashley Clark says: “Nothing has changed in terms of the level but it has certainly made it easier. It is much simpler but the Government has given nothing away.”

But Bamford says the changes “will in simple terms take a number of people out of estate planning.”

As many of these people would be likely to benefit only marginally from the move, he says this change will free advisers to concentrate on clients with more complicated planning needs.

Clients with a total of over 600,000 in assets for a married couple can use several measures to reduce IHT.

First and foremost is the use of gift allowances.

Clark says for clients who still have some IHT liability he would recommend gifts during the client’s lifetime rather than on death.

Clients can gift up to 250 to as many different people as they like in any one year and up to 3,000 in bigger gifts, and gifts more than seven years old, regardless of size, are exempt from IHT.

Then there are the usual array of trusts that can be used. The rules for some of these trusts, interest in possession and accumulation & maintenance trusts, are changing this year but the use of discounted gift trusts can still be used to good effect.

Clark says: “A discounted gift trust is an extremely effective way, if you don’t need the capital, of providing an income.”

Another option, for clients with sufficient funds, is to put money into assets that qualify for exemption from IHT. Investments in Aim-listed stocks and in agri-cultural land or woodland are two such options, provided the investment is held for a minimum of two years.


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