How to develop a truly ‘holistic’ estate planning strategy for clients

The introduction of Consumer Duty rules has reinforced the requirement for holistic financial plans. But how does this affect estate planning?

As financial planners know, a truly holistic financial plan goes beyond merely offering clients advice and involves developing a bespoke plan that not only suits their needs, but also pre-empts any potential issues further down the line. It’s a concept at the core of the Consumer Duty rules, ensuring financial planners truly consider each client’s individual circumstances and recommend products that can achieve the desired outcomes.

Adopting a holistic approach is particularly important when considering different estate planning and IHT strategies where, by extension, it’s essential to consider the client’s beneficiaries. This is especially important in cases where time is an issue, and where conventional approaches may well jeopardise the objective of leaving as much of the estate to beneficiaries as possible.

One such example is the use of potentially exempt transfers (PETs). As a reminder, HMRC considers a PET to be a gift or a lifetime transfer of assets made by an individual to another individual or a specified trust. The PET will be exempt from IHT if the client survives for seven years after making the gift or transfer. However, if they die within three years of initiating the PET, the gift will be included in their estate for IHT purposes. If the person making the PET survives between three and seven years, then IHT will be charged on a sliding scale known as ‘taper relief’.

PETs made waves earlier this year after an HMRC freedom of information request revealed 13,380 PETs ‘failed’ in the 2020-21 tax year, as the donor had died within the seven-year period. The data from HMRC suggested more than 13,000 families consequently faced unexpected IHT bills, despite the best estate planning intentions of the deceased. Therefore, in many cases where clients have a limited life expectancy, alternative strategies for dealing with an IHT liability may be well worth pursuing.

Estate planning for clients with limited life expectancy

Here’s a hypothetical example to consider. Martha is 85 and recently widowed. She began planning for IHT a few years ago with her husband, including making some gifts to their children. While Martha has talked about carrying out some further estate planning with her adviser, she doesn’t want to make more gifts at her age. While Martha has no urgent health concerns, she worries she may not live a further seven years. Martha is in a good position financially, as she draws a significant income from her pension, which could be used to cover care costs if needed.

Martha inherited her husband’s estate when he died, so she now has a £1.8m estate. This includes her home, which is valued at £600,000, and a stocks and shares portfolio worth £400,000. Martha’s financial adviser has explained that her estate will benefit from her nil-rate band (NRB) of £325,000 and her husband’s NRB, which was unused on his death, resulting in a combined NRB of £650,000. As Martha intends to leave her main residence to her children in her will, her estate will also be eligible for the residence nil-rate band (RNRB) of £175,000, as well as the RNRB of her late husband. As a result, Martha’s estate can claim combined IHT allowances of £1m.

The challenge for Martha’s financial adviser is that, as things stand, her estate would result in an IHT liability. After claiming all available IHT allowances, the remaining £800,000 of Martha’s estate will be subject to inheritance tax at 40%, meaning that without any further estate planning, it will have an IHT liability of £320,000 upon her death.

A solution that reduces the IHT liability on Martha’s estate

After talking to Martha about her estate planning objectives, her risk tolerance and her capacity for loss, Martha’s financial adviser recommends she sell her stocks and shares portfolio, investing the £400,000 proceeds into a higher-risk estate planning solution that invests in companies expected to qualify for Business Relief.

The adviser explains that, provided Martha holds the shares in the investment for at least two years and on her death, the amount invested will not be subject to IHT. As a result, the IHT bill due on her estate will be reduced from £320,000 to £160,000 as the £400,000 in Business Relief-qualifying investments will be exempt from IHT. Martha also understands that should she need to access the investment at a later stage, she will be able to draw down an income, subject to liquidity.

Upon Martha’s death, and once probate has been granted, her beneficiaries can ask us to sell the investment on their behalf and ensure all proceeds are paid directly to them. Alternatively, they can ask for the investment to be transferred into their name. Provided it had already been held for the minimum two-year period, the inherited investment should also still immediately qualify for Business Relief.

Finally, Martha’s beneficiaries could ask us to use some of the investment to pay the outstanding IHT bill due on her estate. This is particularly important as probate cannot be granted until any outstanding Inheritance Tax bill has been settled. In cases where the estate has an outstanding IHT bill the executors can instruct us to sell the investment before probate has been granted and we can facilitate payments directly to HMRC, regardless of whether the investment had been held for two years.

For more client planning scenarios and other Triple Point insights into estate planning, please visit our Adviser Centre at triplepoint.co.uk.

Important information

Tax treatment depends on the individual circumstances of the investor and is subject to change. Tax reliefs depend on the investee companies maintaining their qualifying status.

This financial promotion has been issued by Triple Point Administration LLP which is authorised and regulated by the Financial Conduct Authority no. 618187.