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Estate planning for clients who worry it’s too late

Harold and Joan are in their nineties. Their adviser has a helpful estate planning idea.

For this week’s Tax Angle, I’m going to look at a piece of inheritance tax planning that can be effective for older clients who may feel they have left it too late for other approaches like gifting or life insurance.

So if you have older clients you need to speak to about their estate planning, read on.

Harold worries he’s left estate planning too late

Joan and Harold have just celebrated their platinum wedding anniversary (that’s 70 years, if you were wondering). Joan is 92 and Harold is 94. Most of their assets are in Harold’s name, with Joan his sole beneficiary. 

The wedding anniversary prompts Harold to realise he probably hasn’t done as much financial planning as he ought to have done. He and Joan are not getting any younger, and they would like to leave something for their two children and five grandchildren.

So when the couple’s adviser, Laurence, suggests scheduling a call to review their investments and possibly look at some estate planning options, Harold readily agrees. During the call, Laurence tells Harold that, even after the recent market volatility, he and Joan have over half a million pounds on which inheritance tax would need to be paid were they both to pass away without doing any planning for it.

Harold is concerned that neither he nor Joan may survive the seven years necessary to get the full benefit from gifting. Life insurance is not a realistic option because of their ages.

Harold’s adviser introduces him to Business Property Relief

Laurence suggests Harold thinks about making an investment that qualifies for Business Property Relief (BPR), a longstanding relief from inheritance tax. He explains that this would involve holding shares in one or more trading businesses expected to qualify for BPR. Harold’s capital would be at risk, and he may not get back the full amount he invests.

If Harold survives for two years after making the investment and continues to hold the shares until he passes away, they would be expected to qualify for BPR. That means he should be able to leave them to any beneficiary free from inheritance tax when he dies.

On the other hand, if Harold dies within two years and is survived by Joan, the shares can pass to her as his spouse without the need to pay any inheritance tax. She would then continue the two-year clock and only need to survive until the two-year anniversary of Harold making the investment for the shares to be zero-rated for inheritance tax.

In other words, so long as one spouse survives two years, the estate will save on inheritance tax.

Laurence explains to Harold that HMRC assesses claims for BPR when they are made by the estate after someone’s death. There is no advance assurance that a company will qualify and tax rules could change. Tax treatment also depends on personal circumstances.