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The Essential Guide to Estate Planning

"Fundamentally, a Will achieves two things that the Laws of Intestate Succession don’t, the appointment of an Executor or Executors to manage your finances after your death and to specify who has what and when. Remember, currently, the Laws of Intestate Succession don’t recognise the concept of a “Common Law Spouse”, even with children, so a Will is absolutely essential in this situation."

Posted: 5th September 2023 by
Mark Palmer
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Mastering Your Legacy:

The Essential Guide to Estate Planning

Clive Barwell, TEP CFP™ Chartered FCSI

 In a world where financial acumen is pivotal to one’s peace of mind, delving into the intricacies of estate planning and wealth management is imperative. Today, we sit down with Clive Barwell, TEP CFP™ Chartered FCSI, who has a journey as intriguing as his advice. Starting his career serendipitously after a simple bank visit, he swiftly became an expert in matters of Wills, Trusts, Probate, and Tax Advice. With a remarkable 53 years of experience in the industry, Clive’s specialisation in the later-life market has made him a beacon of guidance for many. In this insightful conversation, we explore the vast world of estate planning, unpack the complexities of inheritance tax, and dive deep into the essence of a well-structured will. Join us as Clive demystifies the financial intricacies of our lives and illustrates the importance of planning ahead for the future.

 

Clive, could you start by telling us about your journey into financial planning and why you chose to specialise in the later life market?

In common with many from my generation, financial services wasn’t my first choice of career. The family profession is teaching, and I thought I was going to teach biology.

However, when that didn’t come to pass, and being an impoverished former student, I asked my Bank Manager for an overdraft whilst looking for a job. Instead of interviewing me for an overdraft, he interviewed me for a job, and the rest, as they say, is history. That’s 53 years ago; I started just seven months after decimalisation.

My initial career in the bank was in their Executor & Trustee Department, so Wills, Trusts, Probate, Investments, and Tax Advice. My first client was a widow in her 70s whose late husband had appointed the bank executor. Not only was this lady vulnerable because of her bereavement, she was also vulnerable because of her lack of financial acumen; her husband had dealt with everything secretively, believing he was doing his wife a favour.

I realised that I had an aptitude for dealing with older people, and the outstanding training I received from the bank through a 24-year career stood me in good stead to advise on not only investments but succession planning and taxation, particularly Inheritance Tax (still Estate Duty when I started). I have continued in this vein as an Independent Financial Adviser for the last 29 years.

 

Could you briefly explain to our readers what estate planning is and why it’s so crucial?

 

Estate Planning is the process of cascading wealth down through the generations in the most tax-efficient and timely manner. This is oversimplifying it. Although it is the case for most families, it also encompasses using some of the accumulated wealth for altruistic purposes.

Most of my clients consider estate planning to be crucial because they feel they’ve already paid enough tax whilst amassing their nest-egg and don’t want to pay any more.

The old business adage, “Failing to plan is planning to fail”, applies equally to estate planning.

The first obstacle to achieving someone’s intentions is the loss of capacity.

The recent, tragic case of Derek Draper, Kate Garraway’s husband, who had a dreadful reaction to Covid-19 in his early 50s, serves to illustrate it is never too early to be thinking of a Lasting Power of Attorney. In the absence of a Lasting Power of Attorney, the only alternative is an application to the Court of Protection for a Deputyship order which is costly, laborious, and onerous.

To be fair, Attorneys under a Lasting Power of Attorney for Property & Financial Affairs are limited in the scope of the estate planning they can undertake. However, with a robustly drafted document, Attorneys can certainly continue what has already been started.

The second obstacle is failing to make or update a Will. In the absence of a Will, the Laws of Intestate Succession dictate who has what and when. It is inappropriate to discuss all the ramifications in this article, but in the case of a married couple with young children, the spouse would get the first £322,000 (increased from £270,00 on 23 July 2023) and half of the balance. The remaining half-share goes to the children at the age of 18. Ask yourself what the 18-year-old you would have done with a substantial inheritance at that age. Would the answer have been different at 21 or 25?

The third obstacle is potential care costs, especially following the first death. At least with Inheritance Tax, there’s a reasonable tax-free threshold (see later comments), but in England, the lower means-tested threshold is just £14,250.

According to Lottie, in May 2023, the average cost of a care home in the UK is £928 per week, and a nursing home £1,025, so it doesn’t take long for a king-sized hole to be made in any inheritance.

 

Inheritance tax can be a complex topic for many people. Can you simplify it for us and highlight the most important aspects people need to be aware of to legally mitigate tax liabilities?

 

Simplify it? The HMRC Inheritance Tax (IHT) Manual runs to 40 volumes alone, so it isn’t easy to summarise, but I’ll give it a go. I’ll use the words “couple” and “spouse” by which I mean people who are married or in a Civil Partnership, so it doesn’t include unmarried people living together, regardless of whether they have children together or not.

For ease, I’ll say it is payable upon death when assets pass by Will or Intestacy to a non-exempt beneficiary. An exempt beneficiary is, in essence, a spouse or UK-registered charity. The first £325,000 (frozen since 2009 and until 05 April 2028, at the earliest) is known as the Nil Rate Band (NRB), which isn’t an exemption but a band of net assets (total value of the estate less liabilities) charged at 0%. Everything above this is taxed at 40% (36% if at least 10% of the taxable estate goes to UK-registered charities).

A Residence NRB was introduced in April 2017, which now increases the standard NRB by up to £175,000 if the share in a residence passes to a lineal descendent – basically children, including stepchildren, and all subsequent generations.

This additional NRB is capped at the value of the interest in the property or £175,000, whichever is the lower. Also, it starts to reduce by £1 for every £2 the total estate exceeds £2m.

At £2.35m, the Residence NRB has gone completely.

Unused NRBs pass from one spouse to the other, so for someone with a property valued more than £350,000, with a total estate less than £2m, the total NRB on the second death could be £1m.

The latest statistics from HMRC for the year ending 05 April 2021, show that only 3.73% of UK estates pay IHT, which has been a consistent figure in recent years. For that 3.73% IHT was onerous, with the average IHT bill being £209,000.

 

What are some common mistakes people make when it comes to planning their estate and inheritance tax, and how can they avoid them?

 

We’re back to “failing to plan”, which involves several issues. In some ways, wealth can almost “creep up” on people, particularly in later life – accumulated savings, increase in property value, pension lump sum, an inheritance – and, without realising it, IHT rears its ugly head. There is also the issue of not knowing what you don’t know, so some people, even if they are aware that they have an IHT or long-term care problem, don’t know that there are things they can do to protect their family’s inheritance.

Those that do realise they have an issue often leave it too late to seek guidance. For example, the simplest way to save IHT is to give away surplus wealth during your lifetime. At the point of making a cash gift, there are no tax implications for either the Donor or the Donee, regardless of the amount given away. However, for the gift to be fully effective for IHT purposes, the Donor must survive for 7 years from the date of the gift. If they don’t, the value of the gift is added back into the IHT calculation upon death. Consequently, seeking advice in your late 70s or later greatly limits the options.

I say, “cash gift”, because a gift of an asset subject to Capital Gains Tax (CGT) – a buy-to-let property, for example – constitutes a disposal for GGT and could trigger an immediate tax liability.

 

How has the landscape of estate planning changed in recent years, and what should people be aware of looking forward to, particularly with a likely change in government and, therefore, policies at the next election?

 

IHT was introduced in 1984 and the broad principles remain unchanged, but the key landmarks have been: 2006 limitation on the use of Trusts; the 2007 introduction of the transferable (between spouses) NRB; the 2009 freezing of the NRB; the 2017 introduction of the Residence NRB.

For many in the group known as the “Mass Affluent”, the introduction of the Residence NRB, which effectively fulfilled the Conservative Party’s promise of a £1m NRB, has lifted them out of the IHT net. However, the freezing of the main NRB against a background of increasing asset prices, particularly housing, has exacerbated the IHT issues for higher net-worth individuals.

As already mentioned, means-tested long-term care has the potential to be more detrimental to a family’s inheritance than IHT, so the repeated failure of successive Parliaments to deliver on any of the recommendations in the Dilnot Report is a key consideration in estate planning – low asset thresholds and no cap on expenditure.

As for the future, I think we can see two polar opposites emerging, with the Conservative Party toying with a manifesto promise to abolish IHT and the Labour Party likely to make it more onerous. The Treasury, for example, is keen to reform some lifetime gifting, which has remained unchanged since 1984. Annual gifts of £3,000 are exempt from IHT but if that amount had been index-linked since 1984, it would now be some £9,300. The Treasury has in mind £15,000 but with a sting in the tail – regular, affordable gifts out of income would no longer be exempt. If you are a Billionaire with an income of several million pounds a year, you can really exploit the gifts out of income exemption, with £15,000 per annum hardly noticeable. It doesn’t take much imagination to think that if Rachel Reeves is in number 11 Downing Street as Chancellor of the Exchequer, the Treasury would be pushing at an open door with such reforms.

Another reform on the Treasury’s agenda which might also benefit from that open door is a reintroduction of CGT on death. Currently, taxable assets such as shares and second properties are revalued on death for IHT purposes, but any potential CGT is forgiven whether IHT is payable.

 

Could you delve deeper into the importance of a will in the process of estate planning? Are there any prevalent misunderstandings about wills that you’ve noticed among your clients when they first contact you?

 

Fundamentally, a Will achieves two things that the Laws of Intestate Succession don’t, the appointment of an Executor or Executors to manage your finances after your death and to specify who has what and when. Remember, currently, the Laws of Intestate Succession don’t recognise the concept of a “Common Law Spouse”, even with children, so a Will is absolutely essential in this situation.

Most couples with children, the common solution is to have a Will leaving everything to each other and then on to the children on the second death, which is what most people want to happen. However, there are several factors this doesn’t address, such as:

ü Long-term Care Costs. Prior to the first death, there is a disregard for the matrimonial home for means-testing whilst the other spouse is living in the property, so the cost of care may not be so much of an issue at this point. However, following the first death, the property may have passed by survivorship and everything else via the Will, so the combined assets are available to pay for care.

ü Divorce or bankruptcy of a main beneficiary. An absolute gift to a child on the second death is just that; the inheritance immediately becomes intermingled with the existing assets of that child. Any subsequent divorce or bankruptcy could see some or all the inheritance disappear.

ü Generational IHT. Are you cascading the IHT problem down the generations alongside the wealth?

These potential problems can be overcome using suitable Trusts in the Will, accompanied by a severance of the joint tenancy on the matrimonial home, meaning that a half-share of the property falls into the Will Trust on the first death rather than passing by survivorship. With the Trust including all subsequent generations of the family, it is easy to skip a generation or two if a beneficiary already has their own IHT problem, which will only be exacerbated by an inheritance.

 

In your opinion, when should someone start thinking about their will, and what are the key factors to consider?

 

As soon as you have something to leave – cash in the bank or equity in a property – it is never too soon. My eBook, “Will Writing the dos and don’ts” has a link to a cost-effective, professional starter Will.

Having written a Will, remember it isn’t a “tablet of stone” that will stand the test of time. Your circumstances are constantly changing, and so should your Will; at minimum, it should be reviewed every 5 years.

Whilst you have young children, your Will should appoint Guardians and probably make those Guardians the Executors. Generally, Guardians will be from your generation but, as you get older, they age with you, and you really need someone from a younger generation as Executor(s).

 

Equity release is another term often associated with estate planning. Could you explain what it means and when it could be a suitable option?

 

Equity release is the process of unlocking some of the money tied-up in your home without having to downsize. The most common reasons for accessing equity release are:

ü Paying off debts, especially interest-only mortgages.

ü Home improvements

ü Helping family and friends

ü Gifting

Generally, this is achieved by way of a lifetime mortgage, which is only repayable on the sale of the property, death, or earlier entry into residential care. In the meantime, interest rolls-up on the loan, so is compounding until the loan is repaid.

At the time of writing, interest rates are over 6% per annum, fixed for the duration of the loan. At this rate, a loan of just £10,000 with interest compounding over 10-years, increases to some £18,200.

Over the years, I’ve come across numerous families who have discovered that parents have responded to a television or newspaper advertisement for equity release, gone ahead and not consulted the family and/or taken fully independent advice. In some cases, the parents had other savings or investments which should have been accessed first. In others, children or grandchildren would have been only too willing to help to protect their eventual inheritance.

Equity release is a legitimate tool in the Estate Planner’s kit but something that should only be used as a last resort.

 

 

Lastly, do you have any general advice or important points that you think everyone should know when it comes to estate planning and managing their financial legacy?

Seek professional advice; estate planning is a broad and complex area of financial planning.

Preferably, seek the views of someone you know and find out who their trusted adviser is. If you don’t know anyone who can make a recommendation, then a great starting point is the Society of Later Life Advisers (SOLLA). SOLLA is a not-for-profit consumer protection organisation set up to protect potentially vulnerable individuals from unscrupulous or inadequately qualified financial advisers. Their robust accreditation process is the most arduous test of knowledge, skills, and attitude I’ve undertaken in my 53 years in financial services. Also, it isn’t a once and for all “tick in a box”; the entire accreditation process must be undertaken every 5 years.

 

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