Inheritance tax (IHT) planning is a hugely complex area that can be difficult to grasp. However, leading providers of IHT solutions have quickly realised that once understood, this growing market can offer many opportunities
Right now the inheritance tax (IHT) planning market is presenting advisers with an interesting dilemma. On the one hand, there is recognition that the IHT market is undoubtedly growing. But on the other, there is a growing perception among advisers and investors that IHT planning can be highly complex. The challenge facing product providers is how best to help solve this problem.
Regular press reports all point to a feeling among advisers and their clients that the IHT planning process is complicated. To get to the final stage of effective IHT planning, the adviser and client will often have had to agree IHT planning needs, choose the appropriate trust, select the right investment bond, choose the relevant charging structure and decide on the best funds. Little wonder then that investors can get confused.
However, there is no question that the IHT planning market is a growing opportunity for advisers. It is widely acknowledged that the mass affluent market is growing steadily in the UK. Two of the other main drivers behind the growth in the market are the Peps/Isas market and the continuing rise in house prices. The latter is an often quoted example, but it continues to be highly relevant and impossible to ignore.
When is tax free not tax free?
Many investors do not realise that while Peps and Isas may grow tax free, on death it forms part of their estate for IHT purposes. Recent figures could actually be alarming for some investors. Someone who has invested the maximum in Peps, Isas and Tessas will have used up their nil rate band and more, assuming the savings have grown at the same rate as an average unit trust in the UK All Companies sector.
Peps and Isas contributions alone would be worth £274,000*, almost the full nil rate band. Add in Tessas and the investor has an immediate IHT problem. And that is ignoring any other investments or assets such as property.
Rising house prices
Recently there have been conflicting claims as to the extent of the slowdown in the housing market, or even if it has slowed down at all. The key thing, however, is that the latest figures from the Halifax show that annual house price inflation is still around 12%. Compare that to the 3% increase in the nil rate band announced in the Budget (£275,000 for 2005/06 from £263,000) and it does not take much to work out that the nil rate band is not keeping pace with house prices. And the fact that the nil rate band has been declared for the two following years, means we already know in advance that that situation is not going to improve soon. It is clear then that more and more people will be drawn into the IHT net simply because their property is rising in value.
playing it straight
The big challenge now for product providers is to help take advantage of these opportunities by making the IHT planning process as simple as possible. If we look at the current IHT market, the one area that has been dominating most of the headlines, and a big chunk of the sales, is discounted gift trusts. These trusts have proved very popular because they can provide very effective IHT planning while still providing a degree of access to the capital.
The issue of pre-owned assets tax (POAT) has been hanging over discounted gift trusts for some months and this has added to the uncertainty and general confusion. However the latest details from the Inland Revenue have provided more clarity on the situation. Some providers have taken extra steps to get confirmation from counsel or direct from the Revenue that their arrangements are unaffected by POAT. If an adviser or the client is looking for extra confidence or reassurance in a particular arrangement then this third-party confirmation could be exactly what is required.
What other steps can providers take?
A key thing that a provider can do is streamline the decision-making process. One way to achieve this is by offering 'packaged' IHT solutions. These packaged products combine the trust (often a discounted gift trust) and the underlying bond into one plan. This removes the need for the adviser and client to decide separately on the right trust and the right bond. Some providers have streamlined this even further by simplifying the choice of charging structures within the plan.
Making the decision process easier is the first step, but inevitably when a trust is involved the documentation can appear complicated. Again, this is somewhere where the provider can help. Feedback from advisers clearly indicates that guidance notes to completion and process flowcharts are an ideal way to make the actual application process simpler, by setting out what needs to be done when and by whom. Ideally this would form part of the pre-sale client literature.
No matter how simple the process or how comprehensive the information, there will still be occasions where queries arise. It is here that providers can make a big difference by providing expert technical support on tax and trusts. It is no coincidence that leading providers of IHT solutions are all renowned for their technical expertise. By definition, IHT planning cases tend to involve large sums of money and advisers have come to rely on the reassurance of dealing with providers offering strong technical back up. Another 'added value' element of this technical support could be things like training packages for advisers (often web based) on IHT planning in general or product specific.
At a product level too, providers can make things easier for trustee investors. In terms of fund choice, there is evidence to suggest that trustee investors tend to be cautious in nature. Advisers can sometimes be faced with a vast number of funds to choose from. Providers who focus on a strong cautious fund offering can help to make this fund selection process easier.
The IHT market is growing and there are clear business opportunities out there for advisers. To help them make the most of these, providers have a responsibility to make the IHT planning process as clear and as simple as possible. There are a number of ways this can be achieved, from product design to technical support. Advisers should look to those providers who have taken extra steps to make their, and their clients' life easier.
* Source: Lipper as at 28/02/05. Figure is based on amounts invested on 30 April each year, invested in the IMA UK All Companies sector average, gross income reinvested. Past performance is no guarantee of future performance.
Clarke replacing Balkham
'Deep-dive analysis of client behaviour'
Ways to mitigate April’s increases
The best equity income funds examined