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A Walk Around Intergenerational Wealth Planning

David Findlay, 6 March 2019


The author takes us on a high-level tour of what considerations arise in considering transferring wealth between generations.

The author of this article runs through a series of questions and topics that HNW families need to address when it comes to passing wealth on. Some of the topics might seem obvious but others, less so. The comments come from David Findlay, marketing and communications manager at Utmost Wealth Solutions on the Isle of Man. The editors of this news service are pleased to share these comments and invite readers to respond. To do so, email tom.burroughes@wealthbriefing.com

Intergenerational wealth planning brings with it a number of important considerations.  

Firstly, a person needs to consider who will receive what and whether they want to pass their wealth during their lifetime or on death. These decisions then need to be balanced by the tax implications of any proposed planning.

Other matters also come into focus such as:

-- Do clients want their heirs to know their plans and wishes?
-- Do they know who all their heirs are at the time of planning? For example, do they need to take into account grandchildren and future generations?
-- Are there any persons currently dependent on them should they die?

With the last point in mind, the security of any surviving spouse or civil partner will usually be an important part of any wealth planning process, particularly where the private residence is used in tax planning.

This planning is especially important at what can be a highly stressful time. By making advanced preparations, the burden of filing complicated IHT returns can be reduced.

While UK inheritance tax receipts are forecast to reach £5.9 billion by the financial year 2020/21, it is worth considering that only around 5 per cent of UK estates are liable for IHT. However, for those for whom it is an issue, for the tax year 2015/16 the average IHT liability was £179,000 and 80 per cent of IHT revenue came from those aged 75 or over.

For certain clients, taking steps to pass on their wealth tax efficiently should be high on the priority list.

Effective tax planning can also help here such as:

-- The use of various allowances and reliefs during the individual’s lifetime
-- Making gifts to individuals or to trusts from which the client cannot benefit
-- The client spending their money before they die!

There is also a variety of more bespoke trust arrangements available from life companies that can be used, such as loan trusts and discounted gift trusts. Both these schemes allow the settlor some access to the trust without falling foul of various complex IHT rules.

A loan trust allows for any growth to be kept outside the settlor’s estate whilst they remain entitled to the monies lent to the trustees as a creditor. These can be suitable for people who want access to their capital but not the growth.

Discounted gift schemes are suited to people who have perhaps left their planning opportunities until later in life. This is pertinent given the statistic referenced above that 80% of IHT revenue came from those aged 75 and over. These clients may still wish to make gifts and be comfortable with losing full access to their capital, but require an income from the capital gifted. Assuming they receive a discount, the trust allows for an immediate reduction to the client’s estate even if they should not survive the seven years required for the gift to be completely outside of the estate.

Effective intergenerational wealth transfer and tax mitigation in the UK can be highly complex. Anyone working in this area only need consider the Residence Nil Rate Band legislation which, whilst appearing simple in concept, is incredibly complicated in practice.

HMRC have acknowledged that this area is complex and there is a review of the IHT regime currently being undertaken by the Office of Tax Simplification. Whilst this may offer some answers and perhaps even some changes, it may be some time before these arise, if at all. In the meantime, advisers can add value by understanding the existing regulations and guiding their clients accordingly.

To keep abreast of developments in the financial planning landscape, established product providers have expert technical resources available to help advisers and wealth planners consider the options available when addressing specific client situations and needs. Regardless of any support, this is an area where suitable expert advice needs to be given and reviewed to ensure suitable arrangements remain in place to fulfil client wishes on the future use of their wealth.

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