Following the efforts of the Daily Express to raise consciousness on inheritance tax, I have been looking at how this campaign and the considerable amount of other publicity have increasingly got clients asking their advisers about the tax.
As this phenomenon gains momentum, it is essential that advisers who want to be active in this market are equipped to have effective conversations with interested clients and are fully equipped to deliver the solutions that will enable them to profit from their involvement.
Part of the solution in the context of IHT planning may well be setting out an estate planning strategy in a report explaining how to deliver the desired results with regard to the distribution of one’s estate. It may well be that a fee is charged for this service.
Another part of the solution may be implementing the recommendations made. In respect of cash and investments, this may involve the use of a packaged product such as one of the many capital investment-based estate planning propositions such as loan trusts or discounted gift plans – or a combination.
An asset-class-based approach to estate planning is one that we at Technical Connection have advocated for some time. We think it brings clarity to the whole process. I have mentioned, by way of example, cash and investments. The other key asset classes for most individuals (and I accept that this list is not exhaustive) are residential property, private businesses and pension funds.
Based on the statistics we have seen and the general public’s preoccupation with residential property, it seems that this is the asset class that is most relevant when it comes to IHT. But, at first sight, it seems that it is an asset class that financial advisers who focus primarily on financial services-based products have the least commercial reason to be involved with. Be this as it may, when an asset is this important to clients, you cannot afford to ignore it.
As I mentioned in closing last week, substantial hurdles to lifetime giving have been erected and recently strengthened with the widening of the relevant property regime in the 2006 Budget and Finance Act.
The combination of the gift with reservation and pre-owned asset tax rules will, I think, conspire to impede effective lifetime giving of the main residence or a share for most owners. Aside from shared occupation with donees and full rental arrangements, there is little that can be done if donor occupation is to continue.
Does this mean that many of those couples whose IHT problem stems from the value of their main home are likely to have their nil-rate band intact for use on first death? I believe the answer will be yes if they do not have sufficient other appropriate assets to use the nil-rate band, as the main impediments to the giving of an interest in a private residence – the GWR and Poat rules – are pretty effective.
If lifetime planning will not be a realistic option for many householders, can the nil-rate band be used on the death of the first of a couple to die in connection with the main home?
In theory, yes, by using a debt or charge scheme, for example. However, in practice, the answer will be no for many people. For these people, if there is a strong will to do something about IHT, they may well be interested in considering a solution founded on an appropriate protection plan held in trust for those who will inherit the property.
The silver lining for IHT planners is most definitely the increased appeal of the protection solution. Perhaps its greatest appeal is that one does not have to change or complicate one’s life to accommodate it. There is no need to do anything with your most important asset – your home. Everything just continues as before.
Of course, this seemingly appealing solution does have a price and that is in the shape of the premiums. The cost will, in effect, be the price to pay for keeping one’s life simple. However, it may well be appropriate for the beneficiaries to contribute. After all, they will be benefiting.
I believe that the market for protection as an estate planning solution is one that will increase with rising property values and no relaxation in the IHT anti-avoidance rules.
All good marketing campaigns start with a segmentation exercise so as to ensure the message one is constructing is targeted at the right group of people, that is, those who are likely to be interested in your proposition.
In connection with the protection solution to the IHT problem, a reasonable segmentation exercise will lead us to focus on married couples or registered civil partners who own properties likely to be worth more than a single nil-rate band on the death of the second of the couple to die.
This value could rise to double the nil-rate band if, after an initial discussion, it is discovered that the use of the nil band in connection with the property on first death is feasible. Either way, a segment of all those with properties worth in excess of £285,000 or £570,000 will be one well worth targeting. Many advisers will have clients in this category, I am sure.