I’ve spoken to hundreds of clients over the last 30 years or so about inheritance tax but only a few have actually done something about it. Lots of advisers spend an awful lot of time putting together recommendations only to find that their clients aren’t prepared to do anything about it. Why is that?
Is it because we can’t get them to understand the problem? Is it because advisers see it as a problem but clients don’t? Whilst both of these are true, I believe it’s because we don’t spend enough time finding out how much of a problem it is for them.
I think clients fall into three distinct camps when it comes to the thorny issue of what happens after their death:
- Those who think it’s terrible and they’ll do all they can to avoid their children having to pay it
- Those who think it’s a problem for their heirs and not them ‘I started with nothing and so can they’
- Those who think it is terrible but will do all they practically can to mitigate the problem as much as possible
It’s worth having a conversation with your client before you even get into how much the liability is. Once you’ve understood their feelings, then you can decide on the next steps.
It’s fair to say that traditional solutions are getting trickier to justify; the Discounted Gift Trust and Loan Trusts can fall foul of the client not really needing an income and so the problem doesn’t go away. Giving money away either directly or via a trust means you may not have access to it yourself should you need it and the impact on the nil rate bands of either option is still not fully understood by many. For instance, there is a lot of talk of taper relief but this only applies if a gift over the nil rate band has been made and then, if that is made into trust, a lifetime charge may apply. Finally, the old favourite joint life, second death policy written under trust. Apart from the cost, if you can get a policy underwritten on standard terms these days then you’re doing well.
Then there’s the whole ‘living for seven years thing’ which is a problem for some especially as it seems to be elderly clients who are most keen to act. Having said that, the relatively recent introduction of business property relief based solutions has cut this to two years, but the underlying investments for those schemes can put some off.
I haven’t gone into any technical details here. We should all know what they are as professional advisers. However, I have always believed that the start point of any financial planning exercise is to make a Will (and to use a qualified solicitor to help you). This couldn’t be any more pertinent when it comes to looking at Inheritance Tax.
However, for professional advisers I think the lesson is to let your client tell you how much of an issue IHT is rather you trying to decide for them. It will you save you a lot of time and effort!
Should you wish to speak to a financial adviser, please feel free to contact Head of Adroit Financial Planning, Neil@adroitfp.co.uk.