How to choose a financial adviser

Choosing a financial adviser can seem like a daunting task regardless of your experience with investments and financial matters. It’s typical to be bombarded with calls from prospective advisers when a business sale is announced in the press, or a promotion is made public on LinkedIn. A good relationship with a financial adviser should be built on trust and will usually span over many years, decades or even through multiple generations. How then, can you ensure that you choose a financial adviser that is right for you? Whilst the below list is not exhaustive, it sets out some of the main considerations and questions to ask:

Word of mouth is key

There is no substitute for a referral from a trusted friend, colleague, or another professional adviser such as a lawyer or accountant. Whilst there are plenty of IFA review sites available online, not all advice firms will be signed up to use them. Someone who knows your own personality and working style may be best placed to recommend an adviser that’s a good fit.

Ask lots of questions! A good adviser will welcome any and all questions (and they will be asking you a lot themselves). Their job is to make sure you understand the advice that’s being given, and you should never feel pressured into taking action that you are not comfortable with.

Service Level

What service will you be offered? How often will they meet you and will it be in person? Will they be happy to have ad hoc phone calls? Will you have one central point of contact? All advice firms should have a documented client service proposition which will answer several of the questions in this blog post. Ask the adviser to explain anything that you aren’t completely clear on.

Investments

Make sure you understand the adviser’s investment proposition. Do they manage their investments in house or are they outsourced to a third party? Do they prefer an active or passive approach, or a combination of the two? If ethical/sustainable investing is important to you, will they accommodate your needs? The adviser should explain the risk associated with any proposed investments and how that ties in with your financial planning strategy. Past performance figures can help with understanding how you might expect the investments to perform in certain market conditions, but they should not be relied upon as a forward looking forecast.

Fees

Advisers should be upfront about their fees as well as any fees relating to investments or platforms. They should be able to clearly explain what you will get for your money and demonstrate the value they are adding. We will shortly be publishing another blog post explaining the different layers of fees involved in obtaining and implementing financial advice.

Wider Planning

Many of our clients use several professional advisers, including accountants, solicitors and lending specialists. As there is often overlap between these areas, you should understand whether your adviser is happy to liaise directly with the other parties or sit in a joint meeting to ensure your affairs are joined up neatly. Often, your existing accountant or lawyer will be able to give you a referral to a quality financial adviser who they have worked with before.

Experience & Qualifications

The regulatory bodies have gradually been increasing the qualification requirements for advisers over the years, however there is still a range of levels. Whilst exams are no substitute for experience, it can be reassuring if the adviser or advice firm has attained chartered status, particularly when dealing with more complex planning situations.

Typical Clients

Whilst most advisers will cover a range of planning scenarios, they may have more experience in a certain area or size of client/investment. Ask them how often they deal with situations similar to your own and whether they can give any examples without compromising personal information.

Longevity & Succession Planning

Your financial planning needs will usually not retire when you do! With the increased popularity of flexible pension arrangements, and Inheritance Tax receipts at record levels, your requirement for a financial adviser can last well into your later years. It’s therefore important to ask questions around how long a potential adviser might expect to be working and what kind of succession planning they have in place.

As mentioned earlier, a great relationship with a financial adviser is built on trust, which usually takes time to develop. Most relationships with financial advisers are ongoing in nature rather than a one-off transaction. It’s likely that you will therefore spend a lot of time with them, during which there will be open discussion about personal topics relevant to the advice process. It’s therefore most important that you get on well with them. Their answers to the questions in this post, along with a reliable referral can give you confidence that you have chosen an adviser that’s right for you.

You can search the FCA’s Financial Services Register for firms and individuals, which all authorised advisers will be listed on.

If you would like further information on anything covered in this article, please get in touch via the contact page.

Guide to Inheritance Tax & Estate Planning and how you may be able to mitigate any liability – Part 2

Estate Planning Options – what can you do?

1. Lifetime Gift to a Discretionary/Flexible Trust

If you do not need access to an element of your capital, you could gift that capital into a discretionary trust. A trust is a legal arrangement you can create where the gifted asset is held by a trustee or group of trustees, for the ultimate benefit of a named third party (your beneficiary(s)).

With such a trust, you retain ongoing control over the direction of the capital, e.g. who the beneficiaries are when capital is allocated to beneficiaries and how much is distributed. You can also appoint extra trustees who can fulfil your wishes after death.

A gift into a discretionary trust is treated as a chargeable lifetime transfer (CLT). There would be no immediate tax to pay on cumulative chargeable lifetime transfers in the previous seven years up to the £325,000 limit.

There would also potentially be tax payable at subsequent 10-year anniversaries, or when capital is distributed from the trust. The maximum periodic/exit charge would be 6% of the excess over the nil rate band.

Gifts to individuals and to trusts can be effective elements of an estate planning strategy but if you gift capital, you reduce your wealth and potentially the income that you can generate. There are, however, options available that can provide you with an ongoing income if desired and, in certain cases, access to capital whilst also proving effective from an IHT perspective by reducing the value of your estate. These options tend to fall into two categories, trust-based and non-trust based investments.

2. Trust-Based Investments

Insurance companies offer various products that can provide significant IHT savings for investors. The products are typically ‘investment bonds’ which will be contained within a trust. The trust and legal documentation can be prepared and provided by the insurance companies themselves without cost.

I have provided an overview of the two main types of trust below.

• Loan Trusts

If you invest an element of your capital within a loan trust you can:

• Ensure future investment growth on this capital is outside of your estate with no IHT to pay on it
• Enjoy an ‘income’ by drawing on the loaned capital held within the trust.
• Access and recall the capital that you loan.

This type of arrangement can be highly effective as a form of estate planning as it freezes the capital in your estate for IHT purposes but can also reduce the value of your estate without you having to give up control over the capital or lose the ability to derive an ‘income’ from that capital.

A loan trust arrangement is a long-standing, and highly effective means of gradually reducing the value of your estate over time (as long as the loan repayments are spent!) and ensuring future investment growth falls outside of your estate. It enables you to provide a fund for beneficiaries outside of your estate, retain control over the capital loaned and generate an income from that capital should you wish to do so.

• Discounted Gift Trust

Again, this is a trust-based arrangement using an investment bond. The invested capital is used to provide you with a fixed level of income each year until death. A discounted gift trust essentially splits a capital investment into two elements, namely:

1. A ‘discount’ element, the value of which falls immediately out of your estate for IHT purposes.
2. A ‘gift’ element, the value of which falls out of your estate once you have survived seven years from the date the trust is established.

A discounted gift trust can achieve an IHT saving over a much shorter, accelerated period with an element of the investment falling out of your estate immediately (with the rest after seven years). The limitation of a discounted gift trust is that it cannot be unwound.

In comparison, a loan trust represents a more gradual form of longer-term estate planning. The key attraction of the loan trust is that it gives you security and control. Unlike an outright gift or transfer into trusts, you do not lose control over the capital loaned and can unwind the arrangement and have the outstanding balance of the loan repaid.

These two arrangements can also be used together as part of an overall estate planning strategy.

3. Tax Incentivised Investments

There are types of investments that are advantageous from an estate planning perspective and do not involve the use of trusts. These investments typically focus on the use of Business Relief (BR) to ensure that any capital invested qualifies for 100% relief from IHT after two years.

There are no trusts involved here, so these arrangements can be viewed as simpler and more straightforward. Some types of Business Relief arrangements can also be used to generate an income.

In most cases, the underlying investments used within these arrangements are high risk. Some BR qualifying products will invest in private companies and/or those listed on the AIM market. These are smaller companies, quite often illiquid, that can be highly volatile with returns that fluctuate widely. Whilst these arrangements can be highly effective from an IHT perspective, investors need to be comfortable with the elevated levels of investment risk that typically come with them.

It is important to look at the underlying investments here and not just the tax advantages.

4. Protection

The estate planning options outlined above all cover things you can do during your lifetime to mitigate an IHT liability on your estate.

An additional approach is to accept that there will be an IHT liability and arrange life assurance so that a lump sum is paid to your beneficiaries to help them pay the tax. This would involve taking out a whole of life policy to pay out a sum assured on death (on the death of the surviving spouse for married couples).

There is a cost for this life assurance, and that premium cost is higher than for a term assurance policy because there is a guaranteed payout under a whole of life policy. How attractive this is, depends on how long you live and how many years you will need to pay the premiums.

A number of unknown factors make it very difficult to predict and target any potential tax liability accurately, but life assurance can still serve a useful role in helping to provide your beneficiaries with capital promptly.

Any such policy should be written under a trust to ensure the benefit does not fall into your estate and to enable the proceeds to be immediately paid to your beneficiaries.

Inheritance Tax can be a complex subject and it is important to seek professional advice along the way from an Inheritance Tax and estate planning specialist. Five Wealth Ltd offer independent financial advice to a wide variety of clients, at various stages throughout their investment and retirement planning journey. If you feel that our expertise would be beneficial to you, please get in touch.

The information featured in this article is for your general information and use only and is not intended to address your particular requirements. It is not an offer to purchase or sell any particular asset and it does not contain all of the information which an investor may require in order to make an investment decision. It is based upon our understanding and interpretation of HRMC practice and current legislation Always obtain profession advice before entering into any new financial arrangement.

The Financial Conduct Authority does not regulate tax or estate planning. Levels, bases of and reliefs from taxation may be subject to change and their value depends on your individual circumstances. Some IHT planning solutions may put your capital at risk you may get back less than your originally invested.

Guide to Inheritance Tax & Estate Planning

(And how you may be able to mitigate any liability – Part 1)

Inheritance Tax (IHT) – what is it?

Inheritance tax is a 40% tax applied to estates worth over £325,000 after a person dies. The £325,000 threshold is potentially higher where the individual has inherited a partner’s exempt amount, or if a home is left to children or grandchildren.

1. What’s included in the estate?

The value of your estate for the purpose of inheritance tax includes:

• Your investments & savings – although usually, pensions are exempt
• Any possessions you hold including property
• The value of any money or property you gave away during the seven years prior to death

2. Understanding the nil-rate band

There are several rules and exceptions regarding Inheritance Tax meaning it can get quite complicated, however, understanding the nil-rate band is key.

The nil-rate band is effectively a personal IHT allowance. Everyone receives their own £325,000 nil rate band and will only be liable for Inheritance Tax on the value of their estate that exceeds this value. Any unused percentage of the allowance can be passed on to a surviving spouse and would be claimed on the second death.

If you leave your main property to your children or your grandchildren (including adopted, foster or step-children), you may gain an additional IHT-free allowance of £175,000 which can be offset against the value of the property also referred to as the Residence Nil Rate Band (RNRB). This additional exemption will also be available where someone who has died sold their home or downsized on or after 8 July 2015.

In summary, a person can pass on up to £500,000 completely free of IHT and the combined allowances for a married couple is £1,000,000.

However, It is important to highlight that some of wealthiest estates may not be able to benefit from the RNRB. Estates worth over £2,000,000 will start to lose the RNRB, as it will be withdrawn at a rate of £1 for every £2 over £2,000,000.

This means that based on the RNRB figure of £175,000 in 2022/23, there will be no RNRB if the estate exceeds £2,350,000 for an individual or £2,700,000 for a married couple.

3. What’s exempt from Inheritance Tax?

• If you leave your whole estate to a husband, wife or civil partner then no Inheritance Tax will be payable.
• If a husband, wife or civil partner doesn’t use all of their £325,000 tax-free limits, then any unused part can be passed on to their surviving partner.
• You don’t need to pay Inheritance Tax on anything you leave to charity. And if you leave 10% or more of your estate to charity, then a reduced rate of 36% tax may apply to what is left over. Special rules apply though so seek legal advice if you are planning to do this.
• Gifts out of income that are part of your normal expenditure and which do not have a material

impact on your standard of living are normally exempt from IHT. (This exemption is often used to make regular monthly contributions into investments vehicles for children/grandchildren.)

• Gifts of up to £3,000 in each tax year are exempt from Inheritance Tax, as are small gifts up to £250 to individuals and some wedding or civil partnership gifts. Be aware that larger lifetime gifts could become liable for Inheritance Tax, depending on how much they were and when they were given.

It is good practice to keep a record of gifts you make and which exemptions you are using. This will make the administration of an estate on death much more straightforward.

4. Outright Gifting

If you make other outright gifts to an individual, these are deemed to be Potentially Exempt Transfers (PETs). If you survive for more than seven years from making the gift, then the transfer is free of IHT and is not included in your estate on death.

On death within seven years of making a PET, the value of the PET is included in the estate calculations and uses the Nil Rate Band before it is applied to the rest of the estate. If the value of the ‘failed’ gifts, when added to any earlier gifts within seven years exceeds the £325,000 tax-free limit, IHT will become payable.

Please be aware an individual receiving the gift is primarily responsible for paying the IHT on a failed PET.

In simple terms, if you make a gift and live for a further seven years, that gift will not form part of your estate. If you do not survive the seven years, the amount of the gift will be brought back into the calculation, potentially resulting in an IHT liability on the amount gifted.

Once a gift has been made, you no longer have access to the capital nor can you derive any income from it. If those rules are breached, the gift runs the risk of falling foul of the ‘Gift with Reservation’ rules and it may remain within your estate for IHT purposes.

5. Things to consider before gifting

Lifetime gifts are often seen as a simple way to reduce inheritance tax, but as you can see above, it’s a complicated matter that needs serious thought.

As well as ensuring you abide by the rules, you’ll need to consider the affordability of giving gifts, without leaving yourself short in your later years – when you may need to pay for added expenses such as care or enhancements to your home.

You’ll also need to think about when you want your beneficiaries to gain access to the assets you gift them. For instance, you may want to give money to your children or grandchildren but retain control over what age they receive it. This can usually be done by placing the money into a trust.

Inheritance Tax can be a complex subject and it is important to seek professional advice along the way from an Inheritance Tax and estate planning specialist. Five Wealth Ltd offer independent financial advice to a wide variety of clients, at various stages throughout their investment and retirement planning journey. If you feel that our expertise would be beneficial to you, please get in touch.

Please keep an eye on our blog posts/Linkedin to see part 2 of this ‘Guide to Inheritance Tax & Estate Planning, focusing on the different options for those looking to mitigate IHT.

The information featured in this article is for your general information and use only and is not intended to address your particular requirements. It is based upon our understanding and interpretation of HRMC practice and current legislation Always obtain professional advice before entering into any new financial arrangement.

The Financial Conduct Authority does not regulate tax or estate planning. Levels, bases of and reliefs from taxation may be subject to change and their value depends on your individual circumstances. Some IHT planning solutions may put your capital at risk so you may get back less than you originally invested.