Written by CEO and Founder of WAY Trustees Ltd Paul Wilcox
Whether the move from Rishi-nomics to Truss-o-nomics and then back to Rishi-nomics informs the blueprint for our short-term financial environment or not, there is little doubt that investors are feeling a little wounded right now.
However, most clouds have silver linings and the recent falls in stock-market values can be viewed as a silver lining to offset otherwise quite challenging clouds.
Older clients thinking of making Nil Rate Band gifts into personal trusts, to establish some Inheritance Tax (IHT) planning, can benefit from these depressed levels, not only is this useful to realise value with potentially reduced Capital Gains but, more importantly, gifting at temporarily depressed values means that future returns to more realistic stock-market levels, will then deliver those ‘recovery’ gains completely free of IHT.
Lower markets enabling taxpayers to move proportionately more assets out of their own IHT taxable estates is a significant potential benefit. As they say “buy low and benefit from the recoveries”. Many such taxpayers are not understanding this, regardless of lower stock-market levels. One has to ask why. Why do so many taxpayers die with large sums needlessly invested in IHT taxable assets – albeit currently under some price pressure.
The recent HMRC report on the collection of Inheritance Tax (IHT) makes it plain that their more mature taxpayers pay the lion’s share of IHT – and for one reason only! They wish to retain access to their money as an insurance against costly unforeseen future circumstances that might impact them or their families. The report confirms that taxable estates of £1 million or thereabouts are likely to pay an unfair share of the ever-increasing revenues finding their way into HMRC coffers from IHT.
This is the case even though quite large proportions of their assets appear to have remained either in cash or investments. These surplus funds, in many cases, mean funds in ISA’s, which have been advised and managed and grown with the assistance of conscientious advisers. Of course, ISAs are great vehicles, promoted by the government to encourage saving by means of exemptions from higher rate income tax and capital gains tax. Superb vehicles for accumulating wealth – but not for protecting it.
There comes a time when these very useful but minor benefits are dwarfed by the later impact of inheritance tax at a full 40% of total asset value. The benefit scales turn against ISAs at about the ages of 65 to 70, maybe slightly earlier, because life expectations at that age can allow the 7-year rule to extinguish their IHT bill altogether.
Many taxpayers will survive 14 years and may therefore be able to have two bites of this beneficial cherry. The ‘assurance’ aspects required in later life – family access to those funds if and when needed – can be secured by surrendering ISA funds up to the taxpayers remaining IHT Nil Rate Band* and reinvesting in the same assets within a family discretionary trust.
No insurance funds required, just switching the same funds, managed by the same adviser, into an appropriate settlement (trust) managed by trustworthy corporate trustees operating with guidance from the Settlor. The trustees can then revert, distribute or lend trust assets to the settlor and beneficiaries as seen fit and necessary.
The benefits to families – of a trust versus an ISA – on settlor death after 10 years, means that the net funds available (identically invested and assuming normal trustee fees) would likely be 44% higher than if retained in ISAs, simply by avoiding the death taxes.
Clearly, advisers should remind themselves to enable their clients to achieve these twin benefits of having funds available for family crises as well as denying HMRC 40% of those life savings. If advisers are shy of offering trust advice, then professional trustees such as WAY Trustees will assist those clients, leaving the adviser to offer the ongoing investment advice, as before, with ongoing fees paid by the trust.