Intergenerational planning tips from the coal face – Damian Davies, The Timebank

by | Jun 19, 2018

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This article is part of IFA Magazine’s June series on intergenerational planning

Two hidden conkers to beat the old chestnut

Helping our clients to plan ahead and maximise the amount of their estate which eventually passes to their intended destination after their death is one of the old chestnuts of the advice process.

Let’s be clear though, despite the volume of bad press that trying to avoid tax seems to trigger in the media, the Government are actively encourage sensible tax planning. It’s official and its fine to do it without feeling it’s a guilty secret or wrong.

This is an area where our clients need particular help. It’s complicated and technical and lack of knowledge is evident. With that in mind, I’ve chosen to look at just two specific examples where a lack of knowledge and understanding can really cost families financially.

I would contend that too many “estate planning” initiatives fall into the category of being too little, too late.  Simply by dealing with legacy planning as early as possible provides a massive head start on beating the tax collector.

The first example below using the simple ISA demonstrates how relatively easy it can be with a Government-endorsed favourite – without having to go offshore, and not a trust in sight. I wonder how many members of the population with ISAs who are over the age of 70 even know about this?

The second example is a barely known Government concession for the families of service personnel. This has been enshrined in legislation for years yet most of the public won’t have a clue it exists and how it could benefit them. This example is just about knowing and asking the right questions to save every last penny of unnecessary tax being paid. A total and complete exemption from IHT. This applies to tens of thousands of the population.

Example 1. ISAs, APS and BPR for a touch of jargon and estate/legacy planning

How many members of the public would understand what the jargon APS and BPR actually means even if they knew what the abbreviations stood for? I’d wager it is very few indeed.

With the individual ISA allowance now sitting at £20,000 per annum, it won’t take long for some very substantial amounts to build up within ISAs, particularly with couples. This gives us considerable scope when considering IHT planning.

The only real difficulty for couples, in respect of the tax regime, potentially arises on the second death. Without taking any action, the combined ISAs will be subject to IHT on the death of the last survivor.

The question is, what can be done to avoid IHT following that second death?

Make the most of ISAs

As we all know, ISAs have some major tax advantages for individuals and couples whilst the funds are held within the ISA. However, with a bit of relatively straightforward planning when utilising ISAs, significant amounts of tax and IHT could be avoided.

How many investors/clients really appreciate the use of the APS Allowance (Additional Permitted Subscription)?

Following death, not only can the ISA be passed free of IHT to a spouse or civil partner, but the investments in the ISA still retain their tax-efficient status. So why do so many investors have substantial investments outside this facility?

The usual difficulty we see with elderly clients, whether as partners or on their own, is what happens following death. Most clients just accept that the ISA will be subject to IHT at that point. They are unlikely to know about, or understand Business Property Relief (BPR) and the impact this can have on the amount of their estate which would be subject to IHT.

Simplistically, converting the ISA, in part or as a whole, into an AIM listed portfolio, potentially removes these funds from any IHT bill on death after two years, by gaining 100% BPR.

Making clients aware of what they can and can’t do is paramount. Timing is vital, given the need to survive two years. The death of the first partner is a point in time when everything financial is likely to be reviewed and this opportunity can be discussed.

Talking tactics

But why not do it earlier? For the right clients, the ISA could have been converted to an AIM portfolio two years before death. This would then allow it to be willed to someone other than the spouse or partner without any IHT being liable. The interesting by-product of this is that the remaining partner can still use the value of the ISA as an APS even though they didn’t receive it.

Let’s say a client’s ISA was valued at £50,000. They could utilise the APS Allowance of £50,000 and their own ISA allowance of £20,000, giving them the ability to invest £70,000 in an ISA in that tax year.

In today’s world of divorce, second and even third marriages and children by multiple parents, this is worth bearing in mind about who and how clients wish to leave their estates to in the most tax efficient way.

Clearly there are investment risks involved and lots of other considerations to take into account to assess the suitability of this kind of strategy. However the other major risk – and potential certainty – is a potential loss of 40% to HMRC if the IHT threshold is breached. If a client doesn’t need – or probably won’t ever use – their ISA funds, why would you look to give away 40%?

Do the maths

All other things being equal, a couple with ISAs both valued at £100,000 would be in a position to save IHT of £80,000 on the second death, if their estate exceeded the IHT threshold. Timely education and planning could negate this.

Even with an AIM portfolio, ISAs still give the flexibility to take a regular tax-free income, which is a factor that crops up on a regular basis.

By considering the conversion of some – or all – of the ISA into an AIM listed portfolio within it, creates some very interesting scenarios for both advisers and clients to consider.

Clients can’t utilise strategies which they don’t know about. Most would probably appreciate having a discussion like this with you however and it reinforces the consultative approach about what might be best for them.  A clever use of ISAs could substantially benefit most clients.

Example 2. The granting of a total IHT exemption:  now that’s proper “Help for heroes and heroines”

When you are talking to a client about planning legacies, is the first question you ask, ‘Have you or your partner done military service?’ If not, it should be from now on.

November 2018 will be the centenary of the end of the First World War. It is therefore fitting that we now highlight a much overlooked IHT exemption within the tax code that benefits veterans and their families.

Section 154 of the Inheritance Tax Act of 1984

This section is important. You can find details here. ( ) It contains a provision that allows, under certain circumstances, servicemen or women complete exemption from IHT.

As well as death due to active service granting this exemption, it also caters for service personnel who were disabled, wounded or contracted an illness whilst in the forces.

If at any time in the future their death is deemed to have been due to – or aggravated by -such a wound or illness their estate will become exempt from IHT.

This exemption has to be applied for. However, a good indicator that the individual may qualify is that they are likely to be in receipt of a War Pension for wounds, disablements and illnesses sustained say from World War Two, Korea or Malaya or more latterly a Guaranteed Income Payment (GIP) having been invalided out of the forces as a result of service in Northern Ireland, The Falklands, Iraq and Afghanistan.

Certainly, including World War Two and all the wars since then, this exemption could apply to tens of thousands of ex-service personnel. One only has to see the Invictus Games to realise how many people this affects as a consequence of combat and active service. It is probably far more common than you think. Just in our office, I have two colleagues with three family members who qualify and receive invalidity pensions, one from WW2 in Burma and two from Afghanistan. Even at the age of 96 the Burma veteran still qualifies, as there is no time or age limitation.

Ask the question

So, when you are considering any IHT planning with a client it will be worth asking if they have any previous military service – bearing in mind that a compulsory three years’ National Service in the forces didn’t end until 1963. Lots of National Servicemen and women went to Malaya and other tropical climes and contracted malaria. As a profession we just need to ask if they or their partner (even if the partner is already dead) were in receipt of a disability payment or pension from the Ministry of Defence. It’s that simple.

From a professionalism and risk management perspective, it would be problematical if you found out after the event that your client was exempt from IHT.

Additionally, it creates some interesting estate planning scenarios if your client is likely to be exempt. If the ex-service person’s estate is exempt on their death, on the death of their spouse with the advent of the nil rate personal band being able to be transferred, it means that two nil rate bands will be available before tax is levied.  Some elderly ladies might well be in this position.

Also, if a family can establish that IHT tax was levied when it shouldn’t have been, they can reclaim it. One of my colleagues highlighted this for a friend of his and HMRC sent out a very nice apologetic letter and just over £200,000 as a refund on the IHT already paid once they had verified his father’s military service.

The value of clients’ estates has risen significantly with the rise in home ownership over the years, putting a lot of estates beyond the IHT thresholds. I wonder how many of your clients could benefit from knowing this and gaining your advice?

Making a difference

Financial planners have the knowledge and skills to help clients make the most of their situation in what can be a complex and changing world. So let’s get the message out to as many people as possible and financially improve not only the lives of our clients but the lives of their beneficiaries too.

About Damian Davies

Damian established The Timebank in 2003 after being an adviser and discovering the need for outsourced paraplanning first hand. Since then Damian has directed The Timebank to be the largest paraplanning provider in the UK and is starting to grow the business internationally.


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