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Estate protection

IHT planning is becoming increasingly complex but clients should be offered the option of taking cover for the liability

Last week, I was bemoaning the protection gap but suggesting that advisers were well placed to close it with differentiated proactivity through advised protection sales. I suggested that, even at a simple level, advisers had value to add by enabling protection benefits to be paid tax-free and delay-free.

Turning to the more complex markets, business insurance and estate planning readily spring to mind. Looking at estate planning first, I have said in past articles that provision for the liability through protection plans held in trust is increasingly being seen as a legitimate alternative to planning to remove assets from the estate. This is particularly so where the main asset giving rise to the liability is residential property.

That HMRC has, through litigation and legislation, prevented the effective giving away of residential property by those who want to continue living in it is relatively well known. It is clearly unwilling to stop there though.

To some extent, even planning through the use of the nil-rate band on first death has been made more difficult and in many cases impossible when jointly owned property is involved although some scope does still seem to exist for “first-death” planning, notably through the debt/charge scheme and simple unconditional gifts to other than the surviving spouse where this is appropriate. Professional advice is essential.

Against a background of increasing difficulty and greater uncertainty over the long-term effectiveness of any planning implemen-ted in connection with residential property, clients should at least have the option of choosing to leave things as they are and pay for insurance to provide for the liability.

This is not to say that full consideration should not be given to examining the means by which the inheritance tax liability can be reduced before looking at protection but clients ought to have this option put to them as an alternative.

It does, after all, offer the certainty that it will deliver what it sets out to, in that if the protection plan is written correctly subject to trust it will pay the sum assured at the expected time, free of inheritance tax, to the right people.

All of this without the property owner having to change or complicate his or her life. This will only be a valid option if the person or persons concerned are insurable and the policy represents good economic value.

In its presentation, the payment of the premium could be compared with the alternative payment of inheritance tax. The payment of premiums will naturally take place earlier than the payment of inheritance tax and there will be an opportunity cost to this.

There is also the inescapable fact that the longer the life or lives assured live, the less the overall economic value that the life insurance policy delivers. A small sophistication could be introduced to address any reluctance to pay premiums on the part of the estate-owner in that, after the payment of the first premium (insurable interest only having to be proved at outset), the beneficiaries could take over all or part of the payment of the subsequent premiums.

After all, it is those persons who will benefit from the policy and so many will consider it not unreasonable for those beneficiaries to contribute towards or fully fund the premiums.

Even in this relatively simple “inheritance tax providing” exercise, the solution involves more than a straight product transaction.

The risk of proceeding without advice must be made clear. Advisers should, in the construction of their proposition incorporating the reason why clients should work with them in designing and implementing inheritance tax solutions, clearly demonstrate, perhaps through case studies, what could go wrong without the benefit of advice. This should not be difficult.

Business insurance is another area crying out for an advised solution once the necessary anxiety has been created. Both in business protection (keyperson) and business succession (share purchase) the insurance policy is just part of the solution.

Particularly in connection with business succession, there will be a need for advice on many aspects including business valuation, that is, appropriate for the agreement being entered into, wills, trusts and option agreements and that is only dealing with the staples.

There will also be a need for more sophisticated advice around cost equalisation and many aspects of taxation, for example, income tax, capital gains tax, corporation tax – in the case of corporate businesses – and automatic accrual for partnerships. This is to name just a few of the critically important issues to be addressed.

There will also be some important choices to make with regard to the nature of the policy. That advice should be sought should be made clear to clients and that the adviser has the experience, know-how and ability to articulate clearly both the problem and the solution.

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