Harry Katz, a retired Certified Financial Planner with more than 40 years experience in financial services, takes a sceptical look at recent concerns that HNW clients are facing a major problem due to rapidly rising Inheritance Tax (IHT) bills.
In recent times we’ve all seen the many reports about rapidly rising IHT bills, with the government seemingly raking in rapidly rising IHT receipts – at the cost of the taxpayer, of course.
All this implies that large numbers of people are being clobbered with big bills but is this really the case? Or is it just a case of scare-mongering when some simple basic financial advice and some realism would suffice to head off much of the problem?
These IHT bills, the common wisdom goes, are being paid by High Net Worth (HNW) clients but we should look at what we consider to be HNW. When I was working as an adviser I regarded HNW as anything over £1million in liquid assets.
These people certainly have wealth to transfer to the next generation but I have suspected for quite some time that, as irksome and egregious as this tax is, much of the angst has been promulgated by the providers. And many advisers also have been only too happy to climb onto the bandwagon in the hope of generating income.
I dealt with those who were considered better off for most of my career as an IFA. I have to admit that IHT was not a primary concern for the majority. Yes, there were those who were concerned, but solving their problems was never straightforward – if it could be solved at all.
Everyone is different, so there is no uniform solution that fits all. Trusts are all well and good, but mainly cater for those who do not trust their potential beneficiaries. I found that the best trust was the trust between family members.
So, what do we have? There are those (mainly in the South East) whose main asset is their house and they do not have that much in liquid assets. They may have a pension and the best solution here, in my view, is an annuity as it is very IHT efficient. So, what can you do with a house? Sell it to convert it into cash and move to something smaller, or rent. Not a very popular solution. Move in with the kids. Possible, but again not for everyone.
Those with liquid assets well yes, you can give the assets away and hope to live seven years to avoid tax, but inter vivos insurance does work well in this case. I usually suggested that the potential beneficiaries paid the premium – after all they are the ones who will gain.
But mentioning lifetime gifts is often met with ‘gift aversion’ in my experience. Whole life is sometimes another favoured option, but on closer analysis it is not always cost effective. Take a 60-year-old in reasonable health (they have to be to get the cover at a decent rate). Life expectancy for a male, for example, is currently 80. If he survives, that equates to 20 years premiums. How does the total cost of these premiums compare to the tax saved? Favourably? Possibly…possibly not.
You also have to consider whether the client is getting richer or poorer if you want total cover. Then again it should be the beneficiaries who pay. The most efficient result is if the client dies well before his typical life expectancy – hardly ideal for the client.
There are indeed other ways to ameliorate the tax, many of which do not involve using a ‘product’. In any event, the fact that HMRC enjoys greater and greater revenue in receipts from this tax is in fact (as we all know) a disgrace. Assets have been built up after tax has been paid and on death more tax is taken. Ghoulish.
But it would seem obvious to me that some of this tax is collected because the taxed have not sought decent financial advice. Let us bear in mind that the current nil rate is £325,000 – for a married couple this doubles to £650,000 and then there is residence nil rate of £175,000. So, on a £1 million house £175,000 is payable in IHT. But £825,000 is tax free. Better than a smack in the nose!
Anyway, as I often said to clients ‘Why worry about IHT – you’re not paying it and, in any event, 60% in the hands of your beneficiaries is better than nothing.’
With regard to the house there is the option of equity release, which is bound to be spotted by readers. But the HNW client is going to look at the figures and agree with me that this is just an egregious rip off. Shared equity is a little fairer than a lifetime mortgage but, at the interest rates quoted, the whole house would disappear financially in about 12-15 years. Equity release is very much a last resort and emergency measure and hardly appropriate for IHT planning.
Harry Katz is a retired Certified Financial Planner based in London
