Later life and estate planning – Lewis Jones, Ascot Lloyd Independent Financial Adviser
As we head into Autumn now could be a good time to reflect and revisit later life plans. With such an unprecedented last six months, 2020 will inevitably be a year that stands out for many of us.
When big life changes happen, it can often be a time to reflect and reconsider whether you are on the right path. If you’re approaching your later years then it can also be a time to sweep through your financial plans and make sure you have everything in hand for what lies ahead.
Putting a plan in place for later life, to organise your affairs can be daunting but it will leave you and your loved ones much more secure.
Our Norfolk based Financial Adviser, Lewis Jones, explores the key factors of later life financial planning. Often speaking about our own deaths can be easier than discussing the deaths of our loved ones like parents and older spouses. It isn’t uncommon to find that many clients do not want to discuss what they might inherit themselves at the risk of sounding morbid or insensitive, but this is equally as important.
When is Inheritance Tax (IHT) due?
IHT is paid on death. The IHT due will depend on the value of the estate. To work out the approximate value of your estate you need to add up the value of all the assets you own, i.e. property, savings, investments, personal possessions, etc. This can also include the value of items you own and gifts made in the last seven years. Then deducted from this are any liabilities and IHT allowances, reliefs and exemptions available.
A nil rate band, (NRB), of £325,000 is available to everyone (the band is set at this level until the 2020/21 tax year). For married couples and civil partners, the unused NRB from the first death can be used for the estate of the second spouse to die, giving up to £650,000 of NRB.
Another valuable IHT band is the residence nil rate band.
Property is almost always a major asset for us all and so understanding the residence nil rate band (RNRB) is important.
It is a complicated topic, but making the most of this allowance could save hundreds of thousands in inheritance tax, so it is worth being familiar with it.
The RNRB came into effect on 6 April 2017. For deaths that occur after that date, estates can now claim RNRB on top of the existing £325,000 NRB. The maximum RNRB is currently £175,000 and it will increase every year in line with inflation, measured by the Consumer Price Index.
In order to benefit you will have to have what’s called a ‘Qualifying Residential Interest’. This means the ownership of a residential property has been the deceased’s home at some point. You will also have to pass your property to a direct descendant, such as children and grandchildren. The relief is restricted if the estate value is over £2 million or the property value in the estate is less than the available RNRB. Like the NRB, any unused element of the RNRB can be used against the second spouse’s estate.
IHT is charged at 40% on the value of the estate exceeding the available bands. The rate can reduce to 36% if 10% or more of the ‘net value’ of an estate is left to a qualifying charity.
That's the bad news, but the good news is that, with a little planning, it is also an eminently avoidable tax - perhaps more so than any other.
What can be done?
The use of trusts, gifting, IHT exempt investments (such as Business Relief (BR) qualifying holdings and pensions), utilising full allowances (such as gifting from surplus income or the annual gift allowance and gifts at weddings etc.) and accurate record keeping can add huge value - both in life and in death.
Making the right choice for you will depend on your personal circumstances so professional advice should be sought before embarking on any IHT planning.
Ensuring a will is in place
It is always important to have a will in place and to regularly review it to ensure it is still in line with your wishes. Leaving your estate to the whims of the intestacy rules or worse, a beneficiary whom you would rather no longer benefited, is highly undesirable, and can result in a legal dispute for loved ones at the worst possible moment.
Unlike many financial planning issues which can be time consuming and expensive, will writing for most people is a simple process if your affairs are relatively straightforward.
The largest concern amongst my clients
A clients’ biggest concern is usually the uncertainty inherent in later life planning. Most plans we make in life (e.g. retirement, moving, having children or not) are under our control to some degree, but not everything.
With increasing numbers in need of care homes and state provisions stretched to breaking point, many people like to prepare for a rainy day so that they can have the best possible care when necessary. However, many clients prefer their beneficiaries not to be hit with an enormous IHT (inheritance tax) bill if they never needed such care provisions.
Mitigating IHT is probably the largest concern, along with its counterpart ‘how much is enough?’.
Cash flow modelling can help
Cash flow modelling (a way of forecasting your financial future) and planning with other family members can give you the best tools to visualise the future both for you and your descendants. Although nothing is guaranteed, we can at least create the best plan possible.
A longer-term financial plan of regular gifting alongside spending and IHT reduction where possible is the best way to proceed for most people.
Most investment pots did not develop overnight; nor should they be decumulated in such a fashion. A gifting and IHT mitigation plan can be made over the forthcoming decade, for instance, with a term assurance plan to broadly match the period involved to pay any tax bill should the worst happen. When most people start to think about IHT planning they are not necessarily in the position to gift most of their assets away immediately.
However, they also recognise that they will not make use of much of their wealth in their lifetime and that they are better to have too much than too little, come what may from a tax point of view.
Therefore, rather than reacting in a kneejerk fashion, being proactive and building a later life plan helps clients build something that is tailored to their needs. This can also be adapted if things change in a clients' life or as the investment market and government regulation also change.
Are you looking for some help?
If you would like to find out more about any of the areas outlined above or are interested in receiving some advice, please don’t hesitate to contact your financial adviser.
We are open for business as usual, our Financial Advisers are available on the phone so please contact us if you have any questions.