One of the best sources of new business is your existing clients and, if they are estate planning clients, regular reviews are needed because people’s inheritance tax (IHT) problems tend to only get worse.
Now, not a lot of things remain at the same rate as in 2009. If we turn the clock back, it is revealing:
- Gordon Brown was prime minister
- Alistair Darling was chancellor
- The FTSE 100 suffered its worst-ever year – dropping to 3512 on 3 March following the global financial crisis
- A pint of beer cost £2.05
- In January, petrol cost 87.2p a litre on average
- The average house cost was £179,363
- A loaf of bread cost 65p
But some things resolutely don’t change. On 6 April 2009 the IHT nil-rate band (NRB) was £325,000. And guess what? It still is. Under successive chancellors there will be no amendments to IHT bands until 2021.
If you were writing IHT business back in 2009, we know that, for chargeable lifetime transfers, a client’s NRB renewed every seven years. So any IHT business you wrote in 2009, or earlier, has now dropped out of the client’s estate. They now potentially have a new NRB – albeit it’s still £325,000 – and ‘potentially’ because some clients may already have made further gifts, using up some, or all, of their new NRB.
But the question is, are you making the most of this opportunity to help your clients mitigate future IHT liabilities?
Looking at the information from the Office for National Statistics, a client (male or female, in normal health) who is currently 50 years old could feasibly use five NRBs before they die; someone at 65 could use three NRBs; and even someone who is currently 80 could use two NRBs. If we assume, on a worst-case scenario, that the NRB remains frozen at its current level of £325,000, it would allow a wealthy 50-year-old client to remove £1,625,000 from their estate, saving £650,000 in IHT. This makes it a highly tax-efficient solution.
The NRB has been frozen since April 2009 and, in the majority of cases, the value of a client’s assets will have continued to increase, be that in the value of their home or in the value of investments. So, despite their thinking they had mitigated their IHT liability back in 2009, they may be surprised, or horrified, to discover they still have a substantial liability.
Here is the opportunity for you. Why not look through your client records for 2009 and before and see who used up some or all of their NRB at the time, for a flexible or discretionary trust? They must have had a potential IHT liability at the time, so possibly still have one.
Being seven years older, their mind may be even more focused on the iniquities of IHT and how the taxman is going to get a large chunk of their estate. HMRC has just announced record IHT receipts and, even with the introduction of the residence nil rate band (RNRB) next year, the problem is not going to go away.
In fact, the RNRB could form the basis of your approach to clients. With its introduction next April, it is worth checking what effect it will have on your clients’ potential IHT liability.
Any clients who are making plans to reduce or mitigate their IHT liability should keep accurate records of what they are gifting, and when, because this will make their executors’ job much easier once they are no longer here to answer questions. The HMRC form – IHT403 – is required to be submitted by the executors showing gifts that were made during the seven years before death. Therefore, it makes sense for clients to complete this as and when they make those gifts and, every seven years, they can start a new form. This will ensure that, when a client dies, the executors will have the previous seven years’ information available and no valuable exemptions will be lost.
What about the preferred order of gifting? Where someone makes different types of gift over time, there is a preferred order and, if the client dies within seven years, that order will impact on the amount of IHT payable on death. Getting the order correct could prevent an unnecessary increase in the value of any periodic charge on the 10th anniversary of any discretionary trust. The correct order (in our opinion) is:
- Exemptions and reliefs
- Gift and loan trusts
- Discretionary trusts (chargeable lifetime transfers)
- Bare/absolute trusts or direct gifts (potentially exempt transfers).
It is therefore important to let your clients know that, if or when they decide to start making gifts, they should speak to you first so that you can advise them on the order in which to make those gifts. Many well-off clients will start by making gifts to their adult children (£50,000 here, £100,000 there) and then decide they’d like to do something for their grandchildren. As the grandchildren are young and the clients don’t want to give them a lump sum just now, they will come to see you to talk about investing in a discretionary trust.
Unfortunately, they now have the wrong order for those gifts because the discretionary trust should be done before any direct gifts are made.
Of course, for clients who don’t want to physically give away their capital or assets, or perhaps have given away as much as they can afford but still have an IHT liability, don’t forget they can insure that liability (depending on age and health). On this point, the important thing to remember is that the whole-of-life policy should be written under a suitable trust – otherwise the sum assured will be added to the client’s estate for IHT purposes and could increase that liability.
Once you’ve identified these clients, and established their willingness to mitigate or reduce their IHT liability, there are many trusts to choose from. It could be straightforward gift trusts, gift and loan trusts, and discounted gift trusts on both a discretionary or absolute basis; there are also arrangements using the popular flexible reversionary trust.
So, if you were in the industry in 2009 and writing estate planning business, an approach to your clients from those days could prove worthwhile. And, if you weren’t writing estate planning business then, or have since started in the industry, why not check out ‘inherited’ clients?