If you've done well in life and want to look after those left behind, getting your plans in order is an important consideration - it's also one you don't need to do alone.
SoGlos spoke to a leading financial planner at RBC Brewin Dolphin in Cheltenham to discover some of the best ways to tackle a sometimes thorny topic.
About the expert - George Taylor, financial planner at RBC Brewin Dolphin
George Taylor joined RBC Brewin Dolphin's Cheltenham office in 2018. He advises private clients on their financial planning needs, specialising in pensions, tax-advantaged investments, protection, estate planning and cash flow modelling.
He holds chartered financial analyst and chartered financial planner qualifications and maximises his clients’ finances by making the most of tax allowances and reliefs.
You've worked for RBC Brewin Dolphin for just over four years; what brought you here?
I worked as an equity trader in London for 10 years (day one was Lehman Brothers’ collapse, which was interesting). I enjoyed the previous world, but there was always a voice inside my head telling me this wasn’t my life. I was more interested in personal finance and craved more client interaction, hence the switch.
Why is informing yourself about inheritance tax so important?
Inheritance tax planning is a key area of advice; looking at the different ways to mitigate and/or provide for a significant charge on death, thereby increasing the amount to be passed down to one’s chosen beneficiaries.
Inheritance tax planning is important because helping the next generation is a crucial goal of many clients, seemingly more so now following rises in both the cost of living and general tax burden, which have a disproportionately larger impact on younger generations, not to mention the cost of housing.
And it’s important to become an expert on inheritance tax planning as there are various options available when it comes to mitigating the tax, including direct gifts, trust planning, business relief investment, pensions and life assurance. Each option has its own sub-sets and nuances, which enable us to tailor the solution to each client’s specific needs and objectives, risk tolerance, timescales, desire for ongoing control and desire for ongoing access to funds.
What do you wish everyone realised about inheritance tax?
You shouldn’t feel obliged to do anything. Too many advisers assume inheritance tax mitigation should be a default goal for anyone facing a liability. It shouldn’t. In many ways, the tax ‘isn’t your problem’ and, in most cases, the beneficiaries of those due to incur an inheritance tax charge are likely to still ‘inherit well’. But for anyone looking to ‘do something’ and increase the amount passed down to the next generation, there are plenty of options available.
Can you share an example of successful inheritance tax planning?
A recent client had circa £30,000 per year surplus income (relating to their defined benefit pension) and considerable investments which they were unlikely to ever draw upon. We agreed on the following inheritance tax planning ‘portfolio’:
Establishing a regular gifting pattern of £2,500 per month, to be split between the client’s three children. This is fully exempt from inheritance tax (and with no seven-year rule) under the ‘normal expenditure out of income’ gifting exemption, providing an effective inheritance tax saving of £12,000 (40%) per year.
We agreed to settle £325,000 into a new discretionary trust for the benefit of the client’s children and future grandchildren – the client preferred to retain ongoing control over who, when and ‘how much’ stands to benefit from the trust, and therefore opted for a trust rather than a direct gift. After seven years, the original transfer is no longer liable to inheritance tax, an effective saving of £130,000, whereas any growth in trust investments sits immediately outside the estate.
And we invested a further £100,000 in a portfolio of business relief-qualifying investments. These are exempt from inheritance tax after two years, providing an additional saving of £40,000, all else being equal.
After seven years have passed (i.e. once the trust investment is no longer liable to inheritance tax), and assuming a flat five per cent annual return on the trust and business relief investments, the above would represent an effective inheritance tax saving of approximately £320,000. This directly translates to the additional amount available to the client’s beneficiaries.
Are there any hard lessons you’ve seen clients go through that you’d like to share as a warning?
The most common is leaving inheritance tax planning too late. That generally reduces the available options and may result in a solution that is sub-optimal in terms of the level of investment risk, the degree of control/access to funds, and cost. When it comes to inheritance tax planning, the earlier you start, the better, in terms of the array of options available.
What are your top tips on preserving family wealth?
Following on from the above, start planning early. It’s also best, in my view at least, to have an open discussion with family members around inheritance tax planning. It’s a crucial financial decision and one you don’t need to make alone. Pensions are also often overlooked but in many ways are the perfect inheritance tax planning tool – the monies usually sit outside your estate for inheritance tax but remain readily-available throughout.
Are there any pearls of wisdom we haven’t covered that you’d like to share with our readers?
The best way to mitigate inheritance tax is to go out and spend it. Life is short. If you’re facing a sizeable bill, think of every £1 spent as costing you 60p (i.e. a 40% saving). Suddenly the world is awash with bargains.
The value of investments can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Opinions expressed in this publication are not necessarily the views held throughout RBC Brewin Dolphin Ltd. Forecasts are not a reliable indicator of future performance.