Stephen Jones CFP^CM helps a recently widowed, high-achieving academic cope with the personal loss she has suffered and begins to plan ahead for her financial future.
Despite being 78 at the time of our first meeting, Kaye had only recently retired from a very active career in academia spent largely supporting her husband. A respected professor, Kaye’s husband had held various posts and honours and was a much sought-after speaker.

This had meant that the couple had led a very well-travelled life with many days beginning and ending with official functions. It had been Kaye’s ambition to persuade her husband to retire ‘at last’ to a part of North Wales that they both loved and to enjoy the remainder of their lives together away from the very public life that they had led.

Exactly one week after Kaye had project managed the refurbishment of their dream cottage through to near completion and they had moved in, her husband became gravely ill and died only five weeks later, having never left his new bedroom.

During discussions with the solicitor handling the estate of her late husband, Kaye became aware of the extent of the inheritance tax liability on her eventual death. Kaye inherited all of the estate via a will and her net worth was around £2m.

While Kaye’s solicitor had never referred a client to me before, she had seen reports that I had prepared for some of her clients previously, having been copied. She suggested that Kaye should take advice from me during the administration of her husband’s estate.

What we did to help

My first meeting with Kaye included her solicitor and we agreed that a strategy to tackle IHT should be drawn up which would take Kaye’s lifetime needs into account. With two daughters and various grand-daughters living in two centres in England, Kaye intimated that she might not wish to remain in North Wales on her own. Tragically, one of her daughters was caring for a terminally ill husband, with a degenerative disease. In the face of this and her recent bereavement, Kaye’s pragmatism was evident from outset and we set to work on passing on as much of the estate to the heirs as we could.

Within the estate an Isa portfolio of around £60,000 was managed by Quilter and there was £430,000 in onshore investment bonds and a similar amount in cash and NS&I. The main residence was worth £650,000 and there was a holiday cottage, used often by all of the family, which Kaye had inherited, worth £250,000. Kaye had index linked income of around £32,000 net set against expected spending of £25,000 per annum.

During the meeting we discussed disposals, varying the late husband’s will and the interaction of lifetime taxes such as capital gains tax and income tax on potential disposals. Of particular significance was the holiday cottage, pregnant with capital gains. The solicitor highlighted some practical issues in that the cottage was unregistered and the whereabouts of the deeds was not known. Additionally, it appeared that there was an informal tenancy on a parcel of land attached to the cottage, in favour of a local farmer.

We went on to have a frank discussion about later life for Kaye: the potential impact on her finances if she ever needed care, the possibility of moving closer to one of her daughters. At the end of the meeting the brief was to look at doing as much as possible to mitigate IHT and we agreed that the solicitor and both daughters should be copied in on a strategy report.

As an aside: it springs to mind that it is almost a casual statement that Kaye’s most personal financial details were to be circulated in this way. In fact it is something which is worthy of a pause for thought. Some organisations or maybe compliance bodies seem to think that clients reach a certain age at which point they cannot make their own decisions and there are rules in place that children and beneficiaries must be copied in, or that someone else should be in attendance at meetings.

Another school of thought would be that this is a rather repugnant and patronising approach dreamed up by back office staff. When I was researching life expectancy (for my company name) I came across some research into longevity in Japan and one of the clear contributors was the degree to which the elderly are held in high esteem and are central to not just family but community life and decision making – I suppose the compliance teams in Japan would insist on anyone under age 65 being accompanied by an elder at advisory meetings? But on a more serious note, it could be viewed as absolutely essential that each client must at some point be seen on their own so that there is 100 per cent certainty that they are not being influenced or pressurised by a party with a vested interest.

Children and heirs will be naturally keen on persuading parents to make disposals, save inheritance tax, avoid care fees but sadly it would be wrong to assume that this always with the parent’s lifetime interests at heart – a good practice will be to have at least one meeting alone, perhaps something informal and relaxed, experience has shown that these meetings often produce the best cakes and copious amounts of tea. As stated, this is very much an aside and the family being dealt with here gave no cause for concern.

The strategy report that was produced included the current IHT liability and how it was projected to grow over the next 10 years. The purpose of this was to emphasise the difference between the tax liability now and the tax liability in 10 years’ time – in this case the tax bill was around £540,000 projected to grow to over £900,000 in the period.

As with any lifetime cashflow model, the projection is based on assumptions about asset growth but unlike future needs-based modelling, asset under performance is less of a risk than over performance when considered in relation to the specific objective. Many retired customers will have income in excess of outgoings – that is, their investment assets tend to receive inputs each year and often they do not use investment assets to provide income, which of course means that the balances grow even faster.

Once the consequences of inaction are clearly shown the strategy report goes on to look at the impact of specific disposals of income or assets in isolation and to work out the effect on the rate at which the liability grows and what will be the final projection.

Obviously at this stage there is no need to include product specific details – the objective is to look at how disposing of a certain income stream or asset will impact on the rest of a client’s life – for example, the holiday cottage – what impact will disposing of this have on how Kaye can use it? On her own expenditure if she has to pay capital gains tax and indeed can capital gains tax be avoided, as it was in this case by gifting it to a discretionary trust?

At the end of the strategy report the various steps were combined together to show their cumulative effect and in Kaye’s case it was possible to consider a range of disposals and to vary the will of Kaye’s late husband so that the IHT bill could be eradicated in full during the period in question. In other words the summary was that it was possible to save over £900,000 in IHT over a 10 year period. The challenge for me as an adviser is to do this in such a way that it fits in with the family and Kaye’s lifetime requirements. With all complicated plans, one of the skills essential to any planner, is the ability to set the required actions out in a logical order and in language that is easy to understand while bearing in mind regulatory disclosures.

For Kaye, it was necessary to explain the differences between discretionary and absolute trusts, discounted IHT plans, capital gains tax holdover relief, tenancies common, gifts with reservation provisions for the holiday cottage and any gifts of value from the main residence and so on. Hopefully all of this was achieved without necessarily preparing her and her family to sit the AF1 exam.

The strategy report was distributed to all parties as agreed and was in fact also sent to Kaye’s accountant who completed her personal returns for her. There were only three next steps detailed by me at this stage which were basically a) that all parties should discuss the report together; b) that they should contact me once they had done this and c) that we would then meet up to discuss what needs to happen next.

After a short period Kaye was back in contact and we met up, again with the solicitor present, to discuss how far she wished to go with her planning.

Kaye was keen to progress with all of the measures outlined and in fact stated that she would prefer to go further as she had no desire to maintain ownership of any of her assets. However we discussed some of the implications of disposing of all or part of the main residence while remaining in occupation and the solicitor also advised that she saw no reason to give away more than was necessary.

Following this meeting the solicitor got on with some considerable legal work and a follow up report was produced setting out what trust assets would be available for investment and how they would be managed. We ended up with around £800,000 of funds to manage on behalf of trustees and at this point the Isa manager, Quilter, was brought into the equation and it was agreed that his firm would be appointed to manage trust assets. I prefer firms such as Quilter that do not offer either ‘in-house’ funds or in-house Financial Planners, I think that like me, they stick to what they are good at.

What happened next

From Kaye’s perspective she now knows that her IHT liability will not grow, she knows that it will gradually fall over the next few years and provided that she can survive for the required seven years then she has made a massive difference to what her children will inherit and this is a positive result for all concerned.

In fact, within a few weeks of our last meeting Kaye had already decided that she would move from North Wales and had been house hunting near to the daughter who is caring for her terminally ill husband - part of the arrangements we had made included gifts from income and some outright disposals and Kaye knows that this has greatly eased the financial pressure.

It is a privilege as a Financial Planner to be able to deal with such interesting people and to help them solve their financial issues. When working on the issues such as mitigating IHT in this way, it really does necessitate getting to know how the family ticks.

From a different perspective, that of marketing the services of a Financial Planner and Financial Planning generally – it is easy to see from the above example, that it was possible for the planning work to be reviewed by not only the client but a law firm, accountancy firm, a stockbroker and the next two generations of Kaye’s family. All were helpful in the Financial Planning process. They have all been able to see the process and the projection that £900,000 in tax will be saved during the planning period!

Furthermore, Quilter has been able to report capital growth of around £80,000 on the funds which they manage. While some of this might well have occurred on existing investments, it is pleasing that this uplift will never form part of the estate and will be well used in the future.