Fraser Kerr: Welcome back to Wealth Wise, I'm Fraser Kerr, Regional Director at abrdn Financial Planning and in this series, we bring you the conversations and collective insights to help you achieve more everyday.

The often-quoted statement from former Labor Chancellor Roy Jenkins, is “inheritance tax is a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.”

A recent study has shown that over a third of over 55s, have no idea if their family will pay inheritance tax. Today, we're looking to explain how inheritance tax actually works and how the team at abrdn can help you make better decisions about your estate planning, all with the goal of ensuring that your loved ones are taken care of in an ever-changing world.

Today, I'm absolutely delighted to be joined by Laura Marshall, Financial Planning Director here at abrdn.

Laura Marshall: Hi, thanks for having me.

Fraser Kerr: Great to have you Laura. And Vanessa Hutchison, Senior Private Client Adviser and again here, part of the abrdn Financial Planning team.

Vanessa Hutchison: Hi, Fraser. It's great to be here.

Fraser Kerr: When we're looking at inheritance tax, the main stand out for me has always been that, it is avoidable – active planning can mitigate this. The fact that it's generating last year around 6.1 billion in revenue for the HMRC, which is a significant number.

So, Vanessa, can you actually just explain what the basic considerations are for inheritance tax planning and what should be taken into account?

Vanessa Hutchison: Yes, I think it's important to always start with the basics, so the inheritance tax rate is really quite high, and that's at 40%. So firstly, the nil rate band, for those who don't know what it is, it's simply a tax-free threshold for an individual. At the moment it's £325,000, and it means that you can own up to £325,000 without any inheritance tax available.

There is also an extension of the nil rate band, which is called the residence nil rate band, and that came into power in around 2017. What I will say, this is a bit of a complex relief, but I will cover the basics today. Crucially, because you need to qualify for it is not automatic. So it’s your executors are noted on your will that need to claim it.

And typically your estate, the value of it, needs to be under £2 million and your house needs to be passing to your children or stepchildren if you have them. So, if you don't have children or stepchildren, unfortunately, the residence nil rate band is not one for you. But there are other ways of reducing your estate planning, and I would definitely recommend that you speak to your financial planner.

Fraser Kerr: With inheritance tax planning being a key part of your role. What common mistakes would you see with people when it comes to planning around inheritance and passing wealth on?

Vanessa Hutchison: I think it's a really interesting question. Some people think about inheritance tax first without actually getting the kind of pillars in place which govern your inheritance tax on your estate. And what I mean by that is that your Will decides who gets your estate and inheritance tax is tax levied on how your estate is distributed.

So, inheritance tax is important, but getting your Will in place is equally as important to ensure that the right beneficiaries that you wish to benefit are noted on your Will and also the assets are passed in line so that all reliefs and exemptions are claimed.

Fraser Kerr: And that probably gives people a lot of peace of mind as well, knowing that the loved ones that they want to get the assets are getting it, the money that they've no doubt worked incredibly hard to accumulate and the wealth that they've worked to generate during their working life then is going to take care of those people as opposed to, potentially paying a tax bill and leaving families with a stressful situation to deal with as well.

Vanessa Hutchison: If the Will is not in place, then it’s the defined set of legal rules, which is called intestacy that apply. And the rules are different in Scotland and in England and Wales. And it may be that the people that are in these defined set of rules are not the people that you want to benefit on the estate. And also might be that some inheritance tax reliefs or exemptions are not available as a result of living up the law.

Fraser Kerr: And speaking from experience, I know that family matters can be very complicated and that can be exacerbated quite significantly if there are sums of money involved as well - it’s difficult enough getting some people in my family to buy a round of drinks, let alone split up an entire estate. So, no, I completely appreciate that.

Laura, in your role on the financial planning side, then, a big part of your job is actually educating clients, identifying issues and letting them know that they do have an inheritance tax problem. I mean, what would you say is the most common manner in which you would, firstly broach what is a pretty emotive subject with clients?

Laura Marshall: Yeah. Well, it mostly depends on the client's circumstances and the clients themselves, but they may have either received an inheritance so it's something that you'd be discussing anyway or they've got to a certain age where it's at the forefront of their mind and it's part of their planning or their children have married or, you know, there's lots of different situations where you could bring up inheritance tax and look at different ways to either try and reduce the future tax liability or just educate them that they even have a tax liability because that's one of the things that I think a lot of people don't even know that they're in this situation where their estate would be liable to inheritance tax.

Fraser Kerr: Yeah, I think when I married my wife, my father in law started thinking about his inheritance because he didn't want any of it going to me. So I can imagine that was a bit of a prompt for him too.

Actually following our last podcast, we introduced the Wealth Wise mailbox, which is wealthwise@abrdn.com. Someone actually dropped into that, just when we were talking about inheritance tax, we briefly touched on it, we were talking about cash flow modelling as well - can that be used to try and paint that picture. And I suppose that is something that you would be using with clients to illustrate that there's an issue and demonstrate what that is?

Laura Marshall: Yeah, I mean, it's a really useful tool for most clients looking at accumulating wealth, but more so on the decumulation of wealth side, so taking income from savings or investments and looking ahead to see actually, how much will we have left in our eighties, nineties or even further on. And what that looks like from, leaving that to your loved ones and what the value of that actually is and cash flow modelling’s a really useful tool to demonstrate that it's not always perfect but it does give you a bit of an insight into actually this could be a problem. And when you look at property values and everything else that's happened in terms of assets increasing over the years, it can be quite an eye opener for people to see that they actually do have a liability, or their loved ones would have a liability on their death.

Fraser Kerr: I always find it quite staggering when you're in these meetings and you know, you would draw to a client that they have this issue and you have everything from, on one end of the spectrum doing comprehensive planning to mitigate it down to the last penny, right down to people who are saying - ‘I'm spending all that money and I'm going to enjoy myself’.

How do you find that conversation, Vanessa? When a client's actively saying that they're just happy with it as is?

Vanessa Hutchison: Well, I think half the battle is alerting our clients that there is an inheritance tax issue on their estate and effectively instead of, for example, 20% of their estate going to the children, a large percentage of that will go to HMRC. And is that what the client wants? And if they feel that they are actually quite happy about that, that's completely up to them. It's up to us as advisers simply to alert them, what the inheritance tax rules and how that will impact on their loved ones when the time comes and if they're happy just now, that's completely their prerogative. But maybe, you know, as the years go on, they might change their mind. And when they do that, they know that there's an inheritance tax liability. They could have received another inheritance since then. So a small inheritance tax bill, you know, may have doubled or increased substantially. And perhaps at that point they would want advice and we'll be there to assist them when they need it.

Fraser Kerr: You do have incredible insight into people's lives and you're there for so many emotive moments as well. And like you touched on Laura, when they're receiving inheritance, it's obviously hugely emotive. They're talking about leaving wealth and passing that on, talking about taking care of their loved ones as well. I mean, is that a part of the job that you really enjoy Laura and get a lot out of?

Laura Marshall: Yeah, I mean, you get to know clients really well, obviously, because you're speaking to them about some of the most personal things that they'll talk to anyone about. It's not very common to go around talking to people about how much money you have or don't have or, you know, it's one of those subjects that we just don't talk about, really. And it's quite interesting to have clients that you've been, you know, dealing with for such a long time.

You get to know them quite well. You get to their families well, and so it can be a difficult conversation, but a lot of the time the older clients get, the more they want to talk about it. Actually it’s something that they’re aware of and they want to discuss it. They want to think about are there ways they can reduce it in some way? You know, and a lot of clients know that there are certain things you can do. They'll talk about what happens if you know – ‘what's this seven-year thing’ or could I you know, put in place some life cover or are there things that we can do. So, they read about it, and they’ve heard snippets. And so, it's sometimes clients that bring it up.

Fraser Kerr: Yeah, if there's a news article or something.

Laura Marshall: Yeah. Yeah. And it's not necessarily awkward, but it is an emotional subject. And it does take a bit of getting to know people quite well before you can actually have that conversation.

Fraser Kerr: I guess not on day one, first meeting, the first subject that you want to bring up?

Laura Marshall: But we do – we ask people, you know, if they’ve got a Will, have you got a power of attorney? What are your thoughts on that? And it's, it's just about getting that conversation right, I think.

Fraser Kerr:  Yeah. And in terms of that piece, Vanessa, and, you know, in terms of clients being able to control their estate planning, is there anything else there that you would saying as a sort of early thing that you would really be encouraging people to do is basic core tenancy of looking after their estate and their family?

Vanessa Hutchison: Yes. I mean, you chatted in the last podcast about how volatile the markets are and, you know, what can be done to kind of control what is an uncertain environment at the moment.

And we've spoken about Wills. I mean, they're really crucial to estate planning. I think it's around half the people that don't have Wills. And the half of people that do have Wills probably haven't had their Wills reviewed in decades. So, it could be quite detrimental because the Wills out of date, it's not going to the right people, the legislation has changed since then.

So, the Will is only relevant when you pass away. The other document, which is equally essential is a power of attorney and know that document is only relevant when you're alive and when you're implementing a comprehensive plan, you need to ensure that your attorneys who you appoint in your power of attorney document, are able to carry on that planning for you. Yeah and so Wills and powers of attorney - they are the basic pillars of estate planning.

Fraser Kerr: And again, something that we see quite regularly done with clients - you touched on it there as well Laura with the seven-year exemption and explaining what that is.

In terms of when clients are gifting money as well, it just shows the importance of having, you know, even the basics of good recordkeeping.

Laura Marshall: Yeah, definitely.

Fraser Kerr: So, what's given to clients, when it's given to their loved ones or beneficiaries. Can you just sort of explain what the importance is of that seven-year time period for our listeners?

Laura Marshall: Yeah, basically when or if you're gifting money away, there are different types of gifts. Obviously if you’re gifting - just an outright gift of cash to someone else, not your husband or wife, then that is known as a potentially exempt transfer. And I don't want to get too technical, but after seven years, it's outwith your estate.

That’s pretty much the basics of it. But there are other types of gifts into different trusts and various other ways to gift money away that are a bit more complex and definitely need longer than a podcast…

Fraser Kerr: A bit more one to one time. 

Laura Marshall: Yeah – one to one time. But yes. So there are, there are other basic things that you can do, as part of those pillars, like making sure you've got a nomination on any death benefits within pensions.

If you've got life insurance, know a bit about that and where that money goes on your death and basic things like that that need to be incorporated when you're doing your Wills and power of attorneys as well.

Fraser Kerr: People aren’t really aware that they have an inheritance tax problem, but they also may not be aware that for not declaring inheritance tax, there's actually penalties that are applicable for that as well and for not paying on time too.

So at the moment the penalties are sitting at 7.75% of the total. I mean, is that something that you've had to deal with Vanessa? You know, it’s too late for the planning and then you're trying to deal with the support. Is that something that you have any experience of?

Vanessa Hutchison: Yes, absolutely. I deal with clients during lifetime and also when the time comes as well for the executors to deal with the estate. So, we deal with probate in England, confirmation as it’s called in Scotland. And yes, there's huge issues with this, because the inheritance tax is due six months after the date of death.

And that is quite a quick period to be able to gather all the assets, the values, work out the tax liability and, you know, if not declared properly, as Fraser said, the interest rates are really quite high. And so, yes, we've been in these situations, but we deal with them and make sure the inheritance tax paid timeously, to in effect, to stop an interest rate from occurring.

There are also late penalties if you don't submit the inheritance tax return and in time as well. So, you know, really, if there's something you can take from this is to ensure that you have somebody with the right skill set that can handle this on your behalf to ensure that inheritance tax is dealt with. But also the estate is not further diminished by the interest rate charges for late payment and also for submission of the tax returns as well.

Fraser Kerr: Something that we referred to in the previous podcast as well, the political hot potato of inheritance tax. The Conservative government announcing that this may be potentially abolished. Labour then announcing that they would maybe potentially repeal this if they were to get into power as well. And, you know, when you're talking about these sort of things that definitely aren't set in stone but are getting a lot of prominence in the media. Have you found that's kind of prompted discussion, Laura, or do you kind of think clients are fairly immune to it and more just focused on the here and now in their own situation?

Laura Marshall: No, I don't think they are focused on the here and now. And no, I think a lot of them think about it anyway or have mentioned it anyway. Are they prompted more because of the media? Maybe? Yes. Do they think it will go away? I don't think they do. No, I’m pretty sure most clients that I have spoken to don't think it will go away. I think the current rate at 40% is high. But I have not had any conversations with clients that think that will change, that their estate won’t have an inheritance tax to pay, I've not come across that really.

Fraser Kerr: Yeah. So again, it's just about that awareness piece isn’t it and actually trying to tease that out with clients and where they are and what's going on.

Laura Marshall: I’ve got clients you know, maybe don't have children. So they're less concerned and they're like, you know, I'm planning to spend a lot of this, so I'm not worried. Or, you know, nephews and nieces or God children will get enough that their not worried about them having to pay a tax bill on top of that - or completely the other way around where you know clients that want to put in place different plans to make sure that their children get full value of the work or all of the investments that they've accumulated or pensions or whatever it happens to be because they've worked hard, they've made sure that they've left a legacy for their children. And it's yeah, it just really depends on the individuals.

Fraser Kerr:  Yeah, it's a hugely individualistic subject, but it's also a landscape that's constantly changing. Individual circumstances are a continually moving beasts as well. The importance of having that regular touchpoint, being able to revisit it, being able to come back at it and whilst you are being proactive in your planning, you also want to have that element of being able to be reactive depending on change in circumstance and, and people's position as well.

Laura Marshall: Yeah. And gifting money away is quite a hot topic as well because most of the clients I deal with, they're thinking about inheritance tax planning - and you might be the same Vanessa - they are older in nature because it's, you know they’ve accumulated wealth and it’s in their thoughts the older they get and then other things come into play like - well I don't want to give all this away because I've got, I might need to go into long term care or you know there are lots of different factors that you need to address and, and like you say, it has to be continually reviewed. I've got younger clients who are considering maybe just putting some life cover in place or something along those lines because actually they think, well, I don't know, in ten years' time what, you know, what the inheritance tax looks like, what I’ll need or not need, so we’ll do something now and then we'll look at it again later on.

Fraser Kerr: In terms of the lines between the financial planner and yourself and private client services Vanessa, there are strengths to each of you in terms of the role that you play with clients, but it's being able to offer that comprehensive piece isn’t it, and covering everything off with them. And again, it might be that they don't take action on it, but you're able to comprehensively cover it off, provide that up-to-date solution and have all the professionals in the room at the one time representing them. I mean, it's a pretty powerful force for a client in terms of feeling a lot of peace of mind and clarity at the end of that meeting, wouldn't you say?

Vanessa Hutchison: Yes, definitely. I've worked alongside many planners for clients, which have worked really well. And to give you a bit of an example of one: as the planner meets with the client annually, their best place to see what has changed in their life and see what kind of triggers there are to ensure the estate planning is continually assessed and meets their objectives.

Triggers can be, for example, setting up a business or exiting a business, marrying, divorce, having kids or just a general change in their circumstances. You know, they may have received an inheritance and things like that. Nobody's life tends to stay still. Tax and law tends not to stay still either, despite the nil rate band being frozen since 2009. Inheritance tax shouldn't stay still, but it seems to be at the moment.

But the real benefit of having financial planning and our private client experts working together is that any trigger can be dealt with swiftly and we can work together seamlessly to achieve the client's objectives. For example, if the client has a company and they're a shareholder with one of their friends who is also a shareholder - so, you know, it's kind of key man, shareholders and directors in companies. It's really, really important to ensure that the shareholder or the clients Will says the right thing - because if it doesn't that a half share of that company could go to the spouse. The spouse may not want to deal with the company or know how to deal it, and in that scenario, you would need to make sure the Will is correct in terms of succession law, governing what the company shareholders want, and also the corporate documents are dealt with properly. Does, you know, shareholder protection need to be implemented and people like Laura can help with that. And it's really covering it from all bases, making sure their loved ones are taken care of, but also the people that they've worked hard to have such a successful company, they're protected as well.

Fraser Kerr: The main theme running through this podcast discussion so far has been all about the family and the family unit, passing wealth on through generations. But actually, what you've kind of touched on their Vanessa is so important as well. I mean, that business continuity and businesses can be something that's hugely personal and attached to individuals as well. You want to ensure that successfully transitions as well, continues to survive, continues to be able to support, it’s a really good point. I think probably something that is slightly overlooked in terms of where you are, it's the other side of the coin where you've got estate planning for the family side of it, but also that business side as well. And again, all these key markers can be triggers, you know, about starting a business, selling a business, getting married, children getting married, having children, getting divorced. And you think, it's so many significant life events for people.

Laura Marshall: I had a client – well have a client, it was very similar to that. The shareholding of the business, it was right at the time and then all of a sudden one person sadly dies and the family own - lots of different people know all different parts of the shareholding because it wasn't really structured rightly for it going back into the business. And yes, it's been unpicked, but it has taken a lot of time and it's cost a lot to unpick all of that as well in fees. So and, you know, it's one of those things that you just want to get right as soon as you can, really.

Fraser Kerr: Even if you think things are in good shape, you know, there's no harm in someone checking. And I know that's something I've always said to clients Vanessa, the team do offer just that sort of review audit service where it's a case of, bringing documents in and then just being able to check them and just kind of then summarizing what the key takeaways and implications are.

And I mean, that's just so invaluable for people, isn't it, in terms of them just having that peace of mind that this document actually does what they want? And if not, then they can address that and move forward from there too?

Vanessa Hutchison: We have clients that fall into this, you know, director/shareholder of their own company scenario. They should also not just be thinking about what happens when the time comes for them, but what happens if they have some temporary illness or, you know, in the remote event they lose capacity, who's their attorney in that event? And then is that person the right person to be dealing with the company? So, you know, you're absolutely right, Fraser. It's really important to get your estate planning in order to protect your loved ones, but also to protect the continuity of your assets as well.

Fraser Kerr: We've seen that there's potential discussion about the removal of the lifetime allowance, which previously was a cap placed on the amount of money that you could have within a pension without further tax implications.

It's these significant moments in time where there's changes to sort of core fundamental tenants of financial planning and things that have been in place for decades then been removed. I mean, it just kind of shows that essential planning part of the plan is revisiting it, making sure everything's okay, and making sure that you're managing your affairs in the appropriate way.

Laura Marshall: Yeah, definitely. I mean you could do a full podcast on changes to pension legislation over the years because...

Fraser Kerr: That's Laura volunteering for our next podcast…

Laura Marshall: No definitely not on that subject. But it changes so often - well, not so often. But now the lifetime allowance has been removed, although yeah, it's been removed, but there are still some issues around tax free cash and that sort of thing. But yeah, it does allow for some more planning around the pension. There is a slight issue with annual allowance still, it's getting the money into the pension to accumulate that wealth in there and but yeah like I said earlier, making sure that you've got your nomination of beneficiaries up to date is crucial for that and that feeds into the Will as well.

Fraser Kerr: Yeah, I suppose that would kind of be the key takeaway that we would want people to have - for pension arrangements that you have, ensuring that there's a death benefit nomination form in place for each of those, that’s indicative of your wishes where you want those assets to go. Similarly, making sure that you have Wills in place that are up to date and indicative of what you want to have there as well and reflect in your wishes.

But then also just that power of attorney piece that you've touched on. Vanessa, again, and that's so important.

Vanessa Hutchison: If you don't have a power of attorney and in the event your loved one's need it unfortunately, they have to go and instruct solicitors and go to court. And it takes a long time, and it costs a lot of money, at a time where your loved ones would want to concentrate on looking after you. So, yeah, it's absolutely vital to have these documents. And as you say, hopefully you'll never need it. Yeah, but definitely worth having.

Fraser Kerr: And it really is just such a broad topic. I think all three of us, we can't really stress enough how individualistic this is, not only from a personal standpoint, but also in terms of a financial standpoint, but then it’s also trying to figure out what their aspirations are for their estate, what they want that to achieve, who they want to support and in what manner they want to support people. It really is just important to actively engage with it as well.

So, Laura, Vanessa, thank you so much for being with us today.

Laura Marshall: Thanks, Fraser

Vanessa Hutchison: Thank you, Fraser.

Fraser Kerr: And a special thanks to you, our audience, for listening. If you want to find out more about the topics that we've discussed in the first instance, I would encourage you to contact your planner, but also, we would love to hear from you here at Wealth Wise. If you've got any questions or comments, you can drop us an email at wealthwise@abrdn.com.

Wealth Wise is available on all the usual podcast platforms. Please like and subscribe wherever you usually get your podcasts. Join us next time and until then, goodbye and thanks again.