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IHT planning – cashflow analysis

Andy Hart of the Voyantist.com demonstrates how financial forecasting can be used to give the client a real feel for the process of IHT planning and the value the adviser is bringing to the table

Inheritance tax has been described as a voluntary levy paid by those who distrust their heirs more than they dislike HMRC. This is a thought provoking statement. IHT is paid by approximately 16,000 estates and generates over £3billion for HMRC and this figure is growing year on year, although, in comparison to other taxes, it is small change to the Treasury.

The IHT threshold (nil rate band) has remained at the current level of £325,000 since 2009 and, changes in Government policy aside, it will remain at that level until 2018. If inheritance tax is due, it is levied at 40% above the nil rate band.

The strategies, allowances and products within the IHT ‘mitigation’ market are complex and varied. Historically, solicitors, accountants and financial advisers have serviced this market. My personal prediction is that this market is going to be controlled by financial advisers going forward.

Due to our understanding of the client’s total profile and to the complexity in the financial regulated products that serve this market, it makes sense that we are well positioned to service and control the market.

IHT tool

I am a huge advocate of using technology to enhance my client experience and my wealth management offering. There is no way we can provide any advice that is based on time, money and planning without using capable software; cash-flow or financial forecasting software is now paramount. If you as an adviser fail to (financial) plan, you plan to fail.

In late 2013 Voyant launched an IHT simulator tool and, to my mind, this feature is game changing in the world of financial forecasting software (try doing this on excel). What this simulator does is visually show a client and also the adviser the ongoing IHT payable (based on current tax and legislation), which is obviously performing an incredible amount of calculations. You can then apply various strategies in order to show the effect of proper planning on reducing the potential IHT payable. At the very least you can identify the insurance needed to insure the liability.

The software is capable of modelling, discounted gift trust, loan trusts, spousal bypass trust, gifts from excess income, transferable NRT and various other options. If the software that you are currently using does not offer this, then I would urge you to examine this new tool for your business.

Demonstration

As an example case to demonstrate the power of this new tool, let’s take a financial plan and introduce various IHT mitigation strategies. I call it “layering the plan”, so I build on the previous strategy to create the new planning layer. In Voyant “what if” plans are created instantly. [To clarify this is not an advice/product or technical tax article, I’m purely showing the strength of the IHT simulator that we use with Voyant.]

1: Cashflow + balance sheet (base plan) 

The first chart shows the client’s cash-flow (detailed, you can make this simple) and also liquid asset (this is simple, you can make this detailed).

1 Cashflow + balance sheet

2: IHT payable – no IHT planning 

This chart illustrates the current IHT payable, with no planning.

2 IHT payable - no IHT planning

3: IHT now with a Spousal Bypass Trust (SBT) added

Placing the client’s pension assets into a spousal bypass trust shows the adviser and the client the affect of the trust. As you can see, there is a huge IHT saving during the uncrystalised accumulation phase.

3 IHT now with a Spousal Bypass Trust

4: IHT with SBT + Whole of Life insurance placed into trust

The next strategy is to place a whole of life plan into a trust. This is of benefit during the client’s entire life. This graph also shows the SBT and I mentioned I’m layering and adding to the previous planning with each new ‘what if’ plan. Every new ‘what if’ plan is created instantly within this tool.

4 IHT with SBT + Whole of Life

5: Including 3 + 4 + Excess income £12,500 per annum paid out

The next picture shows the benefit of paying £12,500 per year out of ‘excess income’ utilising this annual exemption, paid out of the estate verses paying this into a saving vehicle. In order to get a true like for like I have grown both items by the same annual growth rate.

5 INC 3 + 4 + Excess income

6: Including 3 + 4 + 5 + £300k PET in year one, into an investment

This is where the planning hots up. This chart now shows a £300k lifetime PET (potentially exempt transfer) in a trust structure. The real IHT saving from this PET being seen after the seven years, which then removes the potential IHT payable for the estate.

6 INC 3 + 4 + 5 + £300k PET

7: Including 3 + 4 + 5  + 6 + moving money from ISA £5k per year for 2 people

The final chart you see includes all of the other strategies and also moving £5,000 per year from the client’s ISAs, utilising the £3,000 per annum individual annual gift exemption. ISAs are great investment wrappers unless the client has IHT liabilities when they become bad investment wrappers, working against the client’s interests. So the question is, when do you start moving assets out of an ISA and into an IHT friendly environment? Every maven financial adviser will have a different answer to this. In this scenario I have modelled switching £2,500 per year from each of the client’s ISAs. This exemption can add up, each year if the full £3,000 is used this instantly saves a client £1,200 of IHT. The compound effect of this exemption is massive. Also all future growth on the money moved out will be within an IHT free environment.

7 INC 3 + 4 + 5  + 6 + moving money from ISA

So to conclude, IHT planning is a growing market (due largely to legislation and growth in asset prices). Likewise, it is an ever-evolving market and financial advisers will be on the front line dealing with it. Software will be crucial in demonstrating the reasons for your advice and showing clients that working with you will result in potentially hundreds of thousands of pounds saved. Fail to (financial) plan, plan to fail. With the simple click of a button Voyant can show a client his or her ongoing IHT liability.

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