Estate Planning:  How to avoid damaging the standard of living for clients in later life

Oxford Capital highlights a useful strategy offering advisers an effective IHT planning solution with flexibility and control

Currently, the majority of IHT mitigation strategies focus on asset reduction, such as gifting, to remove funds from an estate. But, the downside is that there is little or no prospect of a donor retaining control of or access to them – even if he or she really needs them later in IHT their life.

Of course, cash flow planning can be used to predict likely future expenses in an effort to strike a balance between IHT planning and living costs.  But recently there has been concern about how advisers are using some cash flow tools and expectations that the regulator will soon be scrutinising this area more closely.

Proceed with care

Following recent research into this issue, Defaqto’s David Cartwright stated, “Get just one element of the advice process slightly wrong and there is the potential for advisers to destroy the standard of living for clients and their partner for the rest of their lives.” Strong words, but deciding the amounts clients should be left with for later life, is no easy task.

For a start, the UK population is both ageing and living longer, but, typically, men underestimate their life expectancy by almost 4 years, and women by 2 years (Aviva).  And, even without this misjudgement, retirees are now living a decade longer in retirement (at age 65) than when the State Pension was introduced at the start of the twentieth century. Longer retirements bring additional and unexpected financial risks, like the need to support children and grandchildren.

The role of advice

As a larger proportion of UK residents falls into the older cohorts (by 2045 over 65s are predicted to represent a quarter of the population), and illnesses requiring complex care such as dementia, (expected to surge to 2 million by 2051), are increasing, so are care costs.  In fact, in its Occasional Paper 31, Ageing Population and Financial Services of September 2017, the Financial Conduct Authority, stated:

“On average, across the UK, 41% of care home residents are entirely self-funded, 37% are funded by the public purse, and others self-fund part of their care or receive other funding. It is estimated where self-funders run out of money, this costs the state approximately £425 million. Therefore, access to good regulated advice is important, not only for improving consumer outcomes but also mitigating the financial impact of poor planning.”

This must surely be construed as a major endorsement of estate planning incorporating flexibility and the retention of control over funds, without infringing on anti-avoidance provisions such as pre-owned assets and gifts with reservation of benefits.

Business relief offers important benefits

These factors are making it increasingly difficult to accurately predict clients’ future needs as they age and their circumstances and priorities abruptly change.  But there is a simple solution: business relief (BR), which offers up to 100% IHT exemption.

Business relief involves investing funds into shares in unquoted companies undertaking qualifying trades (investors need not be personally involved in the business).  Not only do the companies receive much needed finance, but the invested funds qualify for 100% IHT exemption after just a two-year holding period*, unlike the seven years required for gifts. And, importantly, from the viewpoint of control, BR provides asset conversion rather than reduction as it is simply an investment made in the name of the individual who continues to own it.

Replacement property relief

Advisers are reminded of the added flexibility of replacement property relief (a form of rollover relief); where assets that qualify for business relief are sold, it may be possible to restore the relief immediately by arranging a new BR qualifying investment.  Provided the investments have been held for a combined period of at least two of the last five years, the relief will continue to apply.

There is also no medical underwriting as, for example, is required to take out a life assurance policy and complicated legal structures are not needed, unlike conventional gifts into trust.

The Oxford Capital Solution

While BR does involve investment risk and liquidity may not be immediate, BR investments such as Oxford Capital’s Estate Planning Service offer a level of flexibility and control within their product that can make disposal of the BR qualifying assets, and any subsequent loss of IHT relief, unnecessary when circumstances change.

This is because the discretionary portfolio services give a choice of Growth, Income and Access strategies – see table 1.  But more than this, investors can combine or switch options to suit clients’ developing needs at any time and there are liquidity provisions allowing ad hoc or regular access to capital.

Table 1

Note: fees may apply to switching between investment options and accessing capital

The focus is on capital preservation while targeting inflation beating returns and, to date**, return and liquidity targets have been regularly exceeded.

Case Study

• David is 57. He knows that our cognitive and decision-making facilities tend to decline as we age and he wants to ensure he starts estate planning now, even though his circumstances might change in the future.
• He invests in the Oxford Capital Estate Planning Service
• He chooses Growth with Return
• The following year, his eldest daughter gets married and he requires a lump sum to pay for the wedding. He also knows that his youngest daughter is due to get married in the following year
• As he is aware of the dates of the events in advance, he is able to give sufficient notice to make two ad hoc lump sum withdrawals in plenty of time to cover the costs
• When he is 65, David retires
• So, he switches to Income to give additional dividend income
• At 68, his health deteriorates and he is aware that he will shortly need to enter into care
• At this stage, he decides to incorporate the quarterly income payments access feature to his Income strategy to contribute to his care costs

For more information on the Oxford Capital Estate Planning Service, please go to www.oxcp.com/IHTPlanning

*Must be held on death

**Between April 2015 and April 2018