Towry under fire for inheritance tax advice

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Towry under fire for inheritance tax advice

Towry has been told to pay up compensation for recommending a whole-of-life policy to mitigate an inheritance tax liability of £827,000.

A client, referred to as Mrs A, met with a Towry adviser in 2004.

The adviser recorded her objective as “to achieve the highest gross investment return possible for the level of investment risk acceptable to you”.

Mrs A was recommended various investments to achieve her objective but as she had significant assets which gave her a potentially large inheritance tax liability she was also recommended a whole-of-life policy to be taken out on a ‘maximum sum assured’ basis, which started at the beginning of 2005.

In 2015 Mrs A complained she was mis-sold the whole-of-life policy by Towry Limited because she didn’t need the policy for inheritance tax purposes as she had no debts.

I am not satisfied a whole-of-life policy taken out on a maximum sum assured basis was suitable for her.Philip Gibbons

The client said her children would receive adequate inheritance for their needs, plus, while she had been paying trail commission, the policy was never reviewed during the annual review of her finances by the adviser.

Towry argued recommending a whole-of-life policy was reasonable to mitigate any inheritance tax liability.

The only alternative would have been to pay this out of Mrs A’s estate but this would have left less to distribute to her children.

Towry explained the commission was a matter between the product provider and the broker and added the trail commission did not confer any ongoing right to advice about the policy.

The intermediary added Mrs A was aware of the possibility the premium could increase or cover reduce on review from when she first took out the policy.

In a final decision, ombudsman Philip Gibbons said he had no reason to think the adviser’s calculations Mrs A had an inheritance tax liability of £827,000 were wrong and if she had died her estate would have needed to pay this to HM Revenue & Customs.

Mr Gibbons ruled it was clearly appropriate for the adviser to advise her about her tax liability plus a whole-of-life policy can be a suitable way of protecting an inheritance tax liability if the policy is placed in trust - as Mrs A’s was.

The sum assured that is paid out on death will not itself form part of the estate and attract inheritance tax.

But with this type of policy the premium is set at a low level and most of the premium pays the costs of life cover with not much being invested.

As there is little investment there is no significant fund to pay the increasing costs of life cover.

This makes it likely that when the policy is reviewed the premium will need to increase to keep the same level of cover or the sum assured will have to reduce to keep the same premium.

According to Mr Gibbons, this means a maximum sum assured whole of life policy is generally not suitable as a long term solution for inheritance tax liability.

The adviser recommended maximum cover because it: “is in keeping with the points we have discussed – most notably that your exposure to a potential inheritance bill will be better understood after 10 years following the implementation of other strategies”.

If there was some record of what those ‘other strategies’ or some discussion of how Mrs A’s financial position was likely to change over the following 10 years, Mr Gibbons said this might have meant the policy was suitable.

But as the adviser only refers to Mrs A’s proposed ‘strategy’ to reduce her estate over time, Mr Gibbons said he didn’t think there was a strategy.

Mr Gibbons said: “The adviser had no way of knowing whether there was any possibility Mrs A could significantly reduce her estate over time.

“In the circumstances I am not satisfied a whole-of-life policy taken out on a maximum sum assured basis was suitable for her.”

Mr Gibbons also queried why Towry failed to get Mrs A’s solicitors involved.

He said: “I am surprised Towry feels there was no need for Mrs A’s solicitors to be involved in view of the significant amount of her IHT liability. I think it was clear she needed proper advice about this - which the adviser didn’t provide.

“I think she should have been advised to discuss her IHT position with her solicitors.

“She was not seeking advice about IHT - she wanted advice about investments. IHT cover was not her priority and she was only 55 at the time. The adviser was right to refer to IHT but she was not advised properly about this.”

Towry was ordered to put Mrs A in the position she would have been in if she had not taken out the policy.

Mrs A was told to surrender her policy within a reasonable time of the date of Mr Gibbons’ decision and it was flagged her estate will then be liable for any IHT payable.

Mr Gibbons said: “I understand her estate has increased since the policy was taken out, so her IHT liability is likely to be greater.”