Protecting and preserving family wealth requires holistic tax planning, asset allocation and allowances
Death, money and taxes are highly personal subjects and issues families often find difficult to discuss, and inheritance tax merges all of these.
It can be uncomfortable for children to broach questions over the value and timing of their inheritance for fear of seeming insensitive, while wealthy parents who want to plan ahead may wish to manage their offsprings’ expectations of immediate future wealth. Family dynamics can be tricky, especially when divorce, stepchildren or blended families are involved.
This is where a wealth manager can help, providing a sounding board and helping to guide clients through the process of succession planning, protecting families from bankruptcy or the effects of divorce.
For many families, planning is key to ensuring the estate passes to beneficiaries in line with their wishes and in a tax-efficient manner, says Emma Watson, head of financial planning at Rathbone Investment Management.
“Many families find it difficult to talk about death and money, but it is important to involve loved ones and ensure they understand the individual’s wishes before they die,” she says.
Wealth managers do far more than suggest products and services to their clients. They are deeply involved in helping families identify how to protect their assets from market depreciation and unexpected tax bills, and assist with preserving and passing on wealth to future generations.
A holistic view of a client’s needs
“The challenges for high-net-worth individuals are wealth protection and succession planning,” says Simon Malkiel, a tax and succession planning expert at law firm Howard Kennedy. “They want to pass wealth on to family members, but they also want to keep their children motivated.”
There is also the challenge of present economic and political uncertainty. “We don’t know what the tax situation will be in two months’ time,” he says. “This gives clients the impetus to do something now, as doing nothing is not a viable option.”
Rather than just looking at individual products, it is important to take an overall view of the family’s financial needs and objectives, says Dan Jones, senior wealth planner at Sanlam.
“Providing holistic planning, factoring in all a client’s wider needs, is the core role,” he says. “Key to this is understanding them as an individual and their particular circumstances.”
Family communication is key
When it comes to inheritance tax, early planning makes it easier to address issues and talking about these with family members is also important. Last year’s The Generation Game report by Sanlam found that large numbers of people are relying on inheritances from their parents and grandparents, but many had never talked about it.
“Our client families look to us to help them and we can provide that reassurance,” says John Annetts, partner and specialist in the administration of high-value estates at Howard Kennedy. “We can advise on how to structure their finances within the context of the family dynamics. Often our clients have built a successful business and they might be thinking of selling it. They might be looking to pass on or sell their business during their lifetime.”
They may not want all their wealth to fall into their children’s laps in an unstructured way, he says.
“The three key areas of concern for our clients are the potential profligacy of their children, the divorce of their children or their own divorce, and bankruptcy of children,” Mr Annetts adds.
The inheritance tax allowances explained
Every year, families end up paying unnecessary inheritance tax (IHT) bills because they were unaware of how financial planning could mitigate their liability.
IHT is a tax on the estate – property, money and possessions – of someone who has died. Your family doesn’t pay inheritance tax if the value of your estate is below the £325,000 threshold. A couple has a combined £650,000 allowance if they leave everything to each other on the first death. The standard IHT rate is 40 per cent and is charged on the part of your estate that’s above the threshold.
We don’t know what the tax situation will be in two months’ time. This gives clients the impetus to do something now
“UK residents have available to them a nil-rate band of £325,000 that they can leave behind without the estate being subject to inheritance tax,” says Tim Clasper of Walker Crips Wealth Management.
There is a further relief that applies only to a family’s main residential property, or the main residence nil-rate band, he says. This allows a further £150,000, rising to £175,000 in April 2020, so long as this is passed to direct descendants.
“From April 2020, a married couple with a home worth in excess of £350,000 would be able to pass a combined £1 million to the next generation without any penalty,” he says. This doesn’t include any pension funds as these are outside IHT calculations.
Making gifts during your lifetime
Another option to reduce the size of your estate is to make gifts during your lifetime. These are known as potentially exempt transfers (PETs) because, if you survive for seven years after making the gift, then there is no tax to pay.
“There is no limit to the amount of any PET,” says Mr Clasper. “However, should the donor die within seven years of making the gift, it would be recalled back into the overall calculation of the estate.”
The advantages of setting up a trust
One option to protect your wealth and provide support for children or grandchildren is to set up a discretionary trust. While a trust helps to keep assets and investments safe for future generations, it also gives you control over how and when the money within the trust is used, and you can set out criteria for withdrawals.
“There are many circumstances where an individual’s wealth may be subject to financial attack,” says Tony Mudd, divisional director, development and technical consultancy, at St. James’s Place Wealth Management. “A discretionary trust helps to protect assets in a whole variety of circumstances.”
These include divorce, second marriage and deciding when and how much money can be given to children who have a claim on the trust. Trusts also provide a valuable method of inheritance tax planning. While the assets are in trust, they do not form a part of any beneficiary’s estate. The assets can remain in trust for up to 125 years, he says.
“There are three stages of lifetime,” says Christopher Stothard, executive director and head of financial planning at Charles Stanley. “Accumulation of assets during an individual’s lifetime, the provision of income and capital during retirement, and finally the passing on of assets as tax efficiently as possible to the next generation.” A good adviser will keep in regular contact, update clients with changes in tax and legislation, and make recommendations for the future.