InvestmentsMay 12 2020

Advisers warn wealth transfers may need rethink amid crisis

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Advisers warn wealth transfers may need rethink amid crisis

Advisers have warned that some transfers of wealth from one generation to the next may need to be delayed or rethought as a result of the Covid-19 crisis.

According to Leigh Philpot, head of wealth at Kingswood, the sharp drops recorded in global markets, together with restrictions arising as a result of the lockdown, may necessitate some "straight-talking" conversations with clients.

These conversations, Mr Philpot said, may see advisers encourage their older clients to rethink original plans to pass wealth onto the next generation, and make sure that clients have enough cash to see them through any unexpected expenses that have arisen during lockdown.

Mr Philpot said: "At this time, it is important to be the voice of calm and to provide re-assurance, particularly to clients who were making plans for inter-generational transfers based on the assumed value of their wealth.

"It is a time to remind clients that have seen investment values fall significantly, that these losses are paper losses only, and that in time, markets should recover along with the value of investments."

He said advisers should be straight with clients, however, and point out that during these almost unprecedented times, it is difficult to predict with certainty when that recovery will take place.

"Therefore, advisers should manage clients’ retirement expectations in the current climate and be willing to engage in difficult conversations, pointing out that clients may need to consider potentially delaying the transfer of assets to ensure they have adequate provision for themselves in the near term", Mr Philpot added.

Having said that, there are some positives that could be drawn from the current situation – assets can be passed on with potentially lower IHT implications with the beneficiaries themselves seeing the rise in market values.

For example, house prices have fallen slightly on average across the UK year-on-year, with a recent Bank of England report suggesting property prices might fall up to 16 per cent this year. This could see more property values falling below the £325,000 IHT limit. 

Moreover, a drop in asset prices as a result of market falls could help push other asset values below the cap, as probate is measured on the money, property and possessions of the deceased individual, including any cash holdings or shares that do not qualify for business property relief.

For example, Aim stocks that are held for more than two years qualify for BPR, which reduces the value of a business or its assets when working out how much IHT has to be paid. 

Need for planning 

Despite this potential silver lining, the need for financial planning is very much apparent and Mr Philpot explains the government may need to continue raising money to fund its generous coronavirus payouts through emergency tax measures.

He said: "We are likely to hear more about a Wealth Tax to pay for the huge amount of government borrowing that will be needed to get through this crisis. Although the extent of these potential benefits is yet to be known, inter-generational wealth transfers could see their impact on certain families reduced.

"The important thing is to engage with the clients and provide them with a financial strategy which will navigate them and their families though the crisis and give them a sense of security at this time of great uncertainty.”

However, Sarah Lord, chief client officer at Succession Wealth, said clients have been more keen than ever to get their financial house in order, especially as the news has "focused the mind on our own mortality".

Clients may need to consider delaying the transfer of assets to ensure they have adequate provision for themselves in the near term. Leigh Philpot

She said: "We are seeing clients using the time during lockdown to not only get their house in order but also their finances. Prior to Covid-19 many clients were reticent to discuss their succession planning and what they wanted to happen on their death but now more than ever, many are keen to ensure that they do have a plan in place to look after their families upon their death."

Moreover, she stated solicitors were reporting a surge in individuals wanting to make a will or update an existing will.

This chimed with advisers such as Neil Liversidge, principal of West Riding Financial Solutions, announcing he was offering free will templates to people in his community. 

Ms Lord said it was also important for people to consider power of attorney, and not to leave it too late. "When it is needed, it is not in place. So as financial planners, we have a duty of care to encourage our clients to get lasting power of attorney documents in place, as well as making sure their wills reflect their wishes."

Putting it off

This presents some issues at the moment, with wet signatures still being needed on legal documents despite the move to online signatures across other areas of financial services, such as income protection. 

According to Ms Lord, clients are now "incredibly open" to discussing IHT planning. “Succession planning has always been an important part of the overall financial planning journey that we go through with clients, but, more than ever, it is important to be focusing on this with them."

Sarbjit Chahal, senior wealth planner for Sanlam UK, agreed that clients should not be putting off estate planning, despite the uncertainty.  

He said: "Tragically, Covid-19 has shown that ‘one day’ is not guaranteed, so clients are now seeing that putting off estate planning and getting round to it ‘one day’ may mean that they have left it too late.

"You can’t be over-prepared when it comes to passing on your wealth tax efficiently. You don’t want to rush when putting together inheritance tax solutions so leaving things to the last minute is not advisable."

Mr Chahal said while clients often say they want to make sure their families are protected, they can be slow to act on this. This is why the adviser plays an important role in helping clients put their money where their mouth is.

He said: "Often clients say that looking after their family is their number one priority, however, not putting into place proper estate planning now may mean your family ends up with much less than they could be entitled to."

Ms Lord agreed, adding: "As a planner, I advise on everything financial, such as insurance policies, utility providers, and finance arrangements so it is important that my contact details are on this file too.

"Many clients have time currently to pull this all together and it is also where we as financial planners can continue to help our clients with their financial futures.”

simoney.kyriakou@ft.com