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Blog: Should your clients be worried about IHT?

28 May 2019

With no IHT plan there can be painful consequences for clients’ heirs. Thankfully, there are a number of strategies you can use to reduce their liability…

Family

One of my favourite quotes is from the MP Roy Jenkins, who in 1986 uttered: "Inheritance tax is, broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue".

Another is from my seven-year-old daughter who, when I was explaining IHT to her (well, she did ask!), said: "Why worry about it? You're dead!"

So, why should we worry about it?

The Inland Revenue has a significant income stream in the shape of the so-called 'death tax': it's on course to bring in more than £5.4billion in 2020/21 (receipts were £5.2billion in 2017/18).

With the nil rate band remaining static since 2009/10, and the 'complex' residence nil rate band still tapering (as well as it only being possible to pass to direct descendants), IHT continues to be an extremely important area for you to review with your clients.

Deadline

The recent volatility in the stock and property markets, plus the ongoing uncertainty over Brexit, means their bill can sometimes exceed the 40% your clients will need to pay.

This is because any IHT bill needs to be settled within six months of death, and generally the first port of call will be investments to settle this debt. Should the volatility in the housing and investment markets continue, they may have to sell these assets at a value lower than they'd wish.

If you consider your top clients, what would this mean to your business? And how will this affect your clients' estates?

Protection

There are many strategies clients can use to reduce this liability.

One is the Discounted Gift Trust, creating an immediate removal of IHT at outset of the trust once it is set up. Although useful, the biggest drawback is giving up access to capital and, should your client be in poor health, the discount may not be as significant as the client would have hoped.

Conversely there are also drawbacks to using protection as a solution. However, in my opinion the benefits outweigh them.

One of the drawbacks I often hear is that most clients 'get rated' and no longer wish to proceed. The truth is these clients are precisely those who should be taking this seriously; as any underwriter will tell you, there is a greater chance they will die early (plus, some insurers take a pragmatic approach to underwriting and we are seeing more standard decisions).

The other stumbling block is getting hold of the GP report and completing the medical. But, again, forward-thinking insurers are moving to electronic GPRs, while clients have myriad options for a medical, including, as some clients do, popping down to Harley St.

I'm fortunate enough to work for an insurance company and I tend to go for a private medical every three years. I'll then pass this on to one of our underwriters for an opinion. Usually, they are fairly shocked that, for someone in sales, I have had very little to be concerned about, apart from Uric acid, but hey who doesn't like a nice steak and a glass of red to finish it off?

The simplest way of covering this liability is to use a guaranteed whole of life plan. The clue is in the name: it's a guaranteed contract that, should your clients pay their premiums until death, they will receive the sum assured.

As one of our wealth specialists, Andy Woollon, has mentioned in previous articles, treating this as a separate asset class is something to consider. With this approach, clients' capacity for loss is created at outset - they know what the premium is, and the return. The only unknown is the date of death!

Opportunity

This area can also open up new opportunities for your business.

A colleague and I were in sunny Scotland visiting advisers recently, and we were discussing younger clients and the areas that may be of concern to them now and in the future.

We agreed that speaking to them about their potential inheritance and how their parents were planning for it - and specifically how they believed the 40% charge would be met - was extremely important. Doing so, particularly with couples, opens up the potential for two new clients, as both parents may have a liability.

Luxury watch manufacturer Patek Philippe has a wonderful marketing slogan: 'You never actually own a Patek Philippe. You merely look after it for the next generation.'

Should your clients be lucky enough to own one, a whole of life plan will provide the liquidity for your clients’ heirs so they won't need to sell these valuable assets.

Justin Naughton is a whole of life specialist at Zurich