Not So Fast: Why ‘Get Rich Quick’ Rarely Works in Wealth Management Planning

‘Get rich quick’ as a description of the promise of fast financial gains dates back more than 130 years according to the Oxford English Dictionary. Slightly more recent is the century-old Ponzi scheme, peddled for its supposed high rate of return based on a so-called low-risk investment.

Similar schemes have been doing the rounds for generations. It’s easy to see why impatient investors might buy into the idea of sowing financial seeds that could rapidly reap big rewards.

Our younger clients in particular often take a short-term view. This is understandable in the context of retirement seeming so far away; a general lack of financial education; a boom in cryptocurrency attracting this audience by delivering substantial, albeit volatile, returns; and the need to access capital quickly when it’s harder than ever to get on the property ladder.

But if something looks too good to be true that’s probably because it isn’t. Getting advice from a wealth management expert who will align a long-term financial plan to your personal goals is vital. And experts will almost always tell you that slow and steady wins the race.

If advice is inaccessible, then building financial literacy skills – a key mission for ADL Estate Planning – will help the younger generation manage their finances more effectively.

Take some time to spread your risk

In most of our conversations with clients it’s clear they’ve grasped the volatility and potentially big losses associated with a short-term wealth management strategy. The greater the potential reward, the higher the risk associated with the investment. An expectation of rapid gain should always be balanced with acceptance of possible quick decline.

On the flip side, there’s a widespread understanding that when wealth is nurtured carefully and steadily over a longer period of time, the returns are worth waiting for.

We always start by seeking to understand the client’s unique goals. If that includes a desire to get rich quick we’ll educate them on what good investing looks like. It may seem more boring! But it will protect them against the unpredictable rollercoaster ride of short-term investments.

First and foremost, our advice to clients is to make a plan that will probably run for several decades; throughout their career, during their retirement, and for future generations, covering many life events. It might mean making a mental leap to identify their future needs but taking a focus on the end goals, then working backwards, to ensure their finances will perform well over time. This also helps us predict the level of potential gains and map out when the funds will become available to use.

Investment choices and cashflow models

The other key ingredient of taking the long-term view is sensible investment – and that involves closely considering how to spread risk. Whereas a get rich quick scheme might focus fully on a single investment opportunity, which could go badly wrong and lead to heavy losses, long-term wealth management is underpinned by diversification.

By that, we mean a financial plan that allocates the individual’s funds into a global portfolio, spanning a range of sectors, geographies and asset classes. Unlike investing in a single stock or instrument, if one element of the diversified portfolio came under pressure losses would be minimised – rather than the entire investment being wiped out in one go.

There are plenty of tax wrappers allowing someone to hold a variety of investment funds on the market, which provide an opportunity to gain a steady stream of income over time:

  • ISAs
  • Pension (55-plus)
  • Investment bonds
  • General investment accounts

Cashflow planning with a wealth management expert can identify the best way to invest in some or all of these types of tax wrappers. The underlying investment can be predominantly equities; or fixed income; or a mix of both. It largely depends on the individual’s attitude to risk and when they intend to withdraw funds.

Staying focused on your future finances

Most importantly, we pay close attention to the potential size of the person’s pot when they die. While that might sound morbid it’s fundamental to successful financial planning.

In building cashflow models we assume someone will die aged 100 (currently 12 years higher than average life expectancy). We also factor in 5%pa growth on investments, 2%pa interest rates and 2.5%pa inflation for the purposes of modelling. This helps to identify whether the person would run out of money and exhaust all liquid assets before hitting 100, or die with assets remaining.

Ideally, when someone dies they’ll leave a legacy. Of course, this brings inheritance tax considerations into the equation; but the client’s needs are the first priority and tax planning can follow.

Just as a keen gardener would plant seeds and wait patiently for them to flourish, the investor can stand back and see their long-term wealth management plan begin to reap rewards.

We stay in regular contact with clients and suggest holding annual or regular reviews to ensure the strategy remains sustainable in the long term. This is vital, as personal needs and goals always change over time – so the plan should have some flexibility too.

The review includes a brief overview of current market trends and the investment’s performance. But the fact is, we have no control over short-term market forces. That’s why fixing your eyes on the horizon remains the best way to create a secure financial future.

To discuss your wealth management needs and long-term financial planning book a free e-consultation today.

Inheritance Tax and what you can do to reduce your liability

Inheritance tax (IHT) remains a topic that evokes confusion and concern for many individuals planning their estate. The complexities of the UK’s tax system make obtaining inheritance tax advice a crucial task. This blog describes 3 key strategies to effectively reduce any inheritance tax liability, namely:

  • Strategic Gifting
  • Contributing to a Pension and,
  • Optimising for Business Relief (BR) previously known as Business Property Relief (BPR)

To start off, let’s define Inheritance tax. Inheritance tax is a tax on the estate (the property, investments, and possessions) of someone who has passed away. An estate is not taxed on the first £325,000 known as the nil-rate band (NRB), this increases to £650,000 for a married couple or a couple in a civil partnership.

Furthermore, when passing on a home to direct descendants an estate can claim an additional exempt threshold known as the Residential Nil Rate Band (RNRB) which is a further allowance of £175,000 or £350,000 for a married couple. This means an individual can pass down £500,000 free of inheritance tax on their death, or if married, there’d be no inheritance tax to pay on first death if the beneficial interest passed to the surviving spouse, who could then use a total exempt threshold of £1,000,000, which will not be liable inheritance tax.

Anything above these allowances is taxed at a flat rate of 40%. This means most people in the UK will not face an inheritance tax liability. However, for those that do, there may be several options available to reduce this liability, but expert inheritance tax advice is needed. There are lots of moving parts.

Strategic Gifting

Lifetime gifting is a powerful strategy in IHT planning. By gifting assets during your lifetime, you can significantly reduce the value of your estate over time. There are several exemptions and allowances for gifts, including the:

  • Annual exemption – £3,000 per year
  • Small gifts exemption – £250 per person
  • Gifts in consideration of marriage or civil partnership – £5,000 for a child

These exemptions are too small to make a reasonable dent in a sizeable estate. This is where potential exempt transfers (PETs) and chargeable lifetime transfers (CLTs) come into play, both of which form critical components of inheritance tax advice. PETs refer to gifts made by an individual to another individual (not to a trust or a company) during their lifetime. A PET will only be exempt from inheritance tax if the donor lives for at least seven years after making the gift. There is no limit on how large a PET can be. CLTs refer to gifts made by an individual to a trust during their lifetime, which again, will only be exempt from inheritance tax if the donor survives at least seven years. There is no ‘limit’ per se on how large a CLT can be, however, it is common practice to limit CLTs to £325,000 every 7 years as anything above this would attract a lifetime inheritance tax charge of 20%. A further benefit of settling assets into a trust (CLT) vs. directly gifting to an individual (PET) is 3rd party protection. A gift to an individual will be at risk to divorce settlement claims, creditor claims and general financial mismanagement.

A gift to a trust, provided the trustees are managing the trust well, would provide far greater protection as a trust is a separate legal entity where the individual that the donor wants to benefit can be listed as a beneficiary of the trust, and the trust assets can be controlled by experts and only distributed in accordance with the trust deed and letters of wishes.

Pension Contributions

Pensions can be a potent tool in IHT planning, offering opportunities to pass on wealth outside of one’s estate, thus reducing an inheritance tax liability. A pensions’ primary use case is a vehicle to provide capital and income during retirement. However, if an individual can draw on other assets that are part of the estate first, such as cash, ISAs, and general investment accounts, then withdrawals from the pension can be deferred. In some cases, a pension can be left untouched as because it’s surplus to retirement income and capital needs and in such circumstances the pension becomes a great vehicle for passing on a tax-efficient legacy to chosen beneficiaries. Contributions to a pension attracts upfront tax relief and removes the cash invested from the estate immediately, making them an essential consideration in estate and financial planning.

Business Relief

Business Relief (BR) offers up to 100% relief from inheritance tax on business assets. Qualifying for BPR involves meeting specific criteria, such as holding the assets for at least two years, and ensuring the business is carrying out a trading activity. An investment activity is not considered a trading activity, therefore businesses primarily dealing in property letting and trading securities will not qualify for BPR.

If you own a trading business, it’s likely the shares you own will qualify for BR and the value of the shares will be exempt from inheritance tax. However, if there is any surplus cash on the balance sheet there is a risk this will be treated as an excepted asset. That is an asset that, despite being owned by the business, is not considered necessary for the future success of the business’s trading activities. This can impact the amount of BPR that can be claimed.

People approaching retirement typically look to sell their business. This is great from a cash flow point of view, as one can expect a generous windfall to fund their retirement needs. However, one loses the BR status of the shares sold with cash now sitting in their personal name which is liable to inheritance tax. To mitigate this one can explore deploying the proceeds into investments that qualify for BR such as:

  • Enterprise Investment Schemes (EIS)
    • Investments into UK start-ups and early-stage firms that attract very generous tax reliefs (including BR). This tends to be an investment into an unlisted company that in turn invests into crucial infrastructure projects. Provided you’re dealing with a mainstream provided these tend to have lower volatility than investing into an AIM IHT portfolio.
  • AIM IHT portfolios
    • Investments into AIM listed shares that qualify for BR.

Navigating the complexities of inheritance tax can seem overwhelming, but with the right inheritance tax advice and IHT planning, it’s possible to significantly reduce the tax burden on your estate. Effective estate planning allows you to pass on more of your wealth to your loved ones, highlighting the importance of seeking professional inheritance tax advice to guide you through the process. Whether it’s making strategic gifts, contributing to a pension scheme, or optimising for business property relief, each strategy offers a pathway to minimising inheritance tax and ensuring more of your estate passes to your children rather than the taxman.35t

Why Inheritance Tax Planning is Crucial for Your Financial Future in the UK

Inheritance tax planning is not merely a consideration but a necessity for anyone looking to manage their estate effectively. The concept of inheritance tax (IHT) centres around the tax your estate owes upon your death, if the value exceeds certain thresholds set by the government. Understanding the basics of inheritance tax and its implications is crucial, as it directly impacts the legacy you leave behind for your loved ones.

The mechanics of inheritance tax involve several key elements, including thresholds, rates, and available reliefs. Currently, the IHT threshold, also known as the nil-rate band, stands at £325,000 for individuals. This means that estates valued below this figure are exempt from inheritance tax. For estates exceeding this value, the standard IHT rate applied is 40%. However, strategic inheritance tax planning can significantly reduce this liability, leveraging various reliefs such as the spousal exemption and business property relief (BPR). As well as strategic gifting to individuals or trusts during lifetime.

Inheritance tax can affect various types of assets within an estate, from real estate and investments to personal chattels. Real estate, often the most valuable asset individuals own, can significantly increase the overall value of an estate, potentially leading to a sizable inheritance tax bill. Similarly, investments and businesses that do not qualify for BPR (such as companies that own residential property) are also assessable for IHT purposes. Understanding the impact of inheritance tax on these assets is pivotal in inheritance tax & estate planning advice, ensuring beneficiaries receive the maximum possible from their inheritance.

Effective inheritance tax planning involves maximizing your available allowances to minimise the IHT liability. The nil-rate band offers an opportunity to pass on assets up to £325,000 tax-free. For married couples and civil partners, this allowance can be transferred, effectively doubling the nil-rate band to £650,000. Moreover, the residence nil-rate band (RNRB) provides an additional allowance of £175,000 for individuals, and £350,000 for married couples, when passing on a family home to direct descendants. However, the RNRB is tapered down by £1 for every £2 the estate value exceeds £2,000,000, underlining the importance of thorough planning and understanding of these allowances in inheritance tax planning.

For property owners, inheritance tax planning encompasses several innovative strategies to mitigate tax liabilities. A Holdover Gift Trust can offer a structured way to manage and pass on equity in property efficiently, potentially reducing the inheritance tax burden and deferring any capital gains tax liability. Rental income is given up using this strategy though, so section 102 (b)(iii) planning may be a more suitable option if rental income is still required. If an individual, or couple, own a significant amount in property, then structuring the property in a clever alphabet share class company would offer the ideal solution to optimise against inheritance tax. There are several options available to property owners, however, it is critical to seek inheritance tax & estate planning advice as there are different tax implications for each solution that needs to be considered carefully.

At the heart of inheritance tax planning is the creation of a Will, a fundamental document that dictates the distribution of your estate according to your wishes. Without a Will, your estate is subject to the rules of intestacy, which may not align with your intentions. Additionally, Immediate Post-Death Interest (IPDI) trusts represent a sophisticated planning tool, allowing for greater control over how and when assets are distributed, providing a tax-efficient way to manage inheritance.

In conclusion, inheritance tax planning is an indispensable element of financial and estate management. It ensures your assets are passed on to your beneficiaries in the most tax-efficient manner possible. By understanding the nuances of inheritance tax, from thresholds and rates to the impact on different assets, individuals can craft a strategy that aligns with their goals. Maximising allowances, utilising reliefs, strategic gifting, and ensuring the proper legal foundations are in place via a Will and IPDI trusts are all critical steps in safeguarding your estate for future generations. With the right inheritance tax & estate planning advice, you can secure your financial legacy and provide for your loved ones long after you’re gone.

The Millennial’s Guide to Wills and Wealth Planning: Building Your Legacy

In today’s rapidly evolving financial landscape, millennials are at a critical juncture where wills and wealth planning are not just advisable but essential. The complexity of modern wealth, including digital assets and cryptocurrency, alongside traditional investments, underscores the need for comprehensive estate planning. This blog explores the vital components of estate planning tailored for young adults, emphasizing the importance of early engagement in wills and wealth planning to secure a prosperous future.

Estate planning often evokes thoughts of old age or vast wealth. However, at its core, it’s about ensuring your assets and wishes are respected, regardless of your size of your wealth or the nature of it.

In the UK, the law permits individuals the freedom of testation, allocating their estate to anyone via a correctly executed will. This fact highlights that wills and wealth planning are crucial for everyone, including millennials who might consider that they are still in the wealth building phase.

Estate planning goes beyond mere asset distribution; but includes appointing key individuals or professionals to important roles be they executors, guardians for minors, or attorneys. It offers a structured approach to managing one’s financial and familial responsibilities during times of great distress.

The notion that estate planning is reserved for later stages of life is a misconception. The reality is that the sooner one starts, the better equipped they are to navigate life’s uncertainties. Early engagement in wills and wealth planning ensures your wishes are documented and can significantly ease the administrative and emotional burden on your loved ones during challenging times.

The digital revolution has introduced a new class of assets, from online accounts to cryptocurrencies, necessitating their inclusion in wills and estate planning. Protecting your digital estate is as crucial as safeguarding physical assets. Failure to include these in your estate plan could result in valuable digital assets being lost or unclaimed. The integration of digital assets into your will ensures that all facets of your estate are comprehensively managed, reflecting the totality of your wealth in the digital age.

Investing is a cornerstone of wealth planning. For millennials, creating a diversified portfolio that balances risk with return within appropriate tax wrappers and structures is essential for achieving long-term financial security.

The key is to start investing early, allowing more time for your investments to grow and compound. This proactive approach to investment is an integral part of wills and wealth planning, ensuring that your assets are not only protected but also have the potential to grow.

Ethical investments stand out as a powerful tool for millennials aiming to align their portfolio with their values. Unlike traditional investment strategies that primarily focus on financial returns, ethical investing emphasizes the impact of investments on society and the environment. Incorporating ethical investments into wills and wealth planning not only allows individuals to contribute positively to the world but also ensures that their financial legacy is in harmony with their ethical beliefs. It represents a thoughtful approach to wealth planning, where the choice of investments reflects personal values without compromising on the potential for growth and stability.

Retirement planning is another critical aspect of wealth planning that millennials should not overlook. Starting early in this area allows for a more aggressive investment strategy, maximizing potential returns over a longer period. This foresight is beneficial, as the power of compound growth plays a significant role in accumulating wealth for retirement. Early retirement planning, coupled with strategic wills and wealth planning, provides a solid foundation for future financial stability.

Understanding the implications of inheritance tax is crucial in wills and wealth planning. In the UK, the standard inheritance tax rate is 40% on estates valued over £325,000. However, strategies such as gifting, trusts, and charitable donations can mitigate this tax burden. Efficient planning can significantly reduce the amount of tax payable, ensuring more of your estate is passed on to your beneficiaries. This aspect of wealth planning underscores the importance of early and informed estate planning to optimize tax efficiency.

The landscape of wills and wealth planning is broad and encompasses more than just the distribution of assets upon death. It’s about making informed decisions that align with your personal and financial goals, protecting not only your assets but also your digital legacy, and ensuring your wishes are executed as intended. For millennials, engaging in wills and wealth planning is a step towards securing a legacy that reflects their values and desires. By addressing these elements early on, millennials can build a comprehensive estate plan that not only safeguards their wealth but also lays the groundwork for a prosperous future.

Essential wealth planning for new law firm partners

Essential wealth planning for new law firm partners

In a recent post we considered what graduates who are beginning a budding career in law need to know about managing their finances. Now it’s time to focus on the higher rungs of the law firm ladder with our wealth management planning advice for new and prospective partners.

You may have dreamt for many years of being a law firm partner, but now you’ve made the grade what’s in store for you financially? In many cases it’s the promise of immediately bigger income. As with the top rung of many professions your future earning potential will also be greater.

But that isn’t the whole story. Your changing circumstances as a ‘partner in waiting’ – where you’ve had the nod but still have targets to achieve – or a newly appointed partner will also give rise to new financial requirements.

ADL helps many legal professionals just like you, who are making the step up to partner, with wealth management planning. In this article, we consider what partners need to know about financial management, and why you should start planning as soon as possible.

What your new pay package will look like

First, let’s look at how law firm partners can expect to be compensated for their dedication and expertise.

While not all partner roles are the same, there are three general classifications of partner remuneration:

Equity partner – Where the partner’s income depends on the law firm’s profits. Profit share agreements can either be based on individual partners’ levels of seniority at their firm; or a mixture of that plus an additional annual performance-based share. As covered later, equity partners are required to invest capital in the business; again, the details of this will vary by firm e.g. cash contribution or loan.

Fixed share partner – This arrangement is a reduced form of equity partner (see above), with the partner’s income usually determined on a profit share basis, but at a lower percentage than full equity partners. Fixed share partners are often contracted to guaranteed minimum payments even in a year of poor profit. Bonuses/commission can also be part of their remuneration.

Salaried or Income partner – Unlike the two partner types above salaried/income partners remain on PAYE. They receive a contractual amount that doesn’t take into account the firm’s profits, which are not part of their income. That said, bonuses and commissions may still be paid.

There’s a lot to get to grips with. At a time when you might also be taking on bigger or more complex cases that would positively impact your and the firm’s reputation, it’s also important to consider how your financial compensation package could affect any wealth management planning.

Understanding financial risk and reward as a partner

Broadly speaking the issues below are the main financial considerations at this point of your legal career. Here’s a closer look at the issues you might encounter and our initial advice on how to approach them:

From safety net to self-employment – If you’re becoming an equity or fixed share partner the law firm will require you to switch to self-employment for tax purposes. If this is the first time you’ve moved away from PAYE you’ll need to get used to setting money aside to pay tax every January and July.

When you come off payroll you’ll also lose access to the firm’s employee benefits package. Removal of death in service and critical illness benefits is especially important, particularly for new partners who have a mortgage and/or a family to maintain.

Solution: Not all law firms automatically stop employee benefits: we work with some that are still entitled to a lump sum payout should the partner die, for example. But more often than not you’ll need to think seriously about replacing insurance policies to make sure you are appropriately covered in case the worst happens. The key word here is “appropriately”; this means more than having an equivalent sum being paid out by the insurer, but rather also being set up under trust, and then paid out of the trust correctly – especially where it’s covering a mortgage.

We helped a newly appointed partner who lost access to payroll benefits, recommending income protection to cover essential outgoings and a decreasing term assurance policy for their mortgage.

Off the payroll, out of the pension scheme – Closely linked to the point above is another common problem to solve: leaving your firm’s pension scheme if you’re a self-employed partner. That means you’ll need to start funding your future retirement yourself – and without the right advice pensions can be a minefield.

Solution: We recommend transferring the pension you’ve accrued at the law firm into a private scheme. From there, you’ll need to restart the regular contributions you were already making and review the level when your income begins to rise, for example through a greater share of profit-related bonuses. This is something we handled for a newly promoted partner; it’s important to review your contributions after 6 or 12 months, when you’d normally receive your first bonus.

It’s all about maximising pension allowances. However, partners are likely to use carry forward quickly. At this point you’ll want to make the most of ISAs and – once those are maxed out – alternative options such as Venture Capital Trusts.

As explained in our recent blog High Earner, High Pressure?, which considers investment options for people on bigger incomes, VCTs are tax-efficient collective investment schemes. They are designed to boost UK start-ups and scale-ups while providing income and capital gains for investors, in exchange for the increased risk you’re taking on.

 An increase in personal financial risk – Depending on the structure of your law firm you may be exposed to a much higher level of financial risk which can even include assets such as your family home.

In a limited company or limited liability partnership exposure levels are lower. Partners are required to invest up front – typically through capital or current accounts, directors’ loan accounts or existing profits. Typically, risk matches the level of initial investment made.

But risk is higher at firms with a traditional partnership that becomes insolvent if, for instance, the partnership performs badly or suffers a negligence claim that exceeds professional indemnity cover. In some cases, the creditor might even choose to pursue a specific partner further putting their personal assets at risk.

Solution: It’s a counterpoint to your success as a legal professional that financial risk increases even as you begin to earn more money as a partner. You might also need to take out a loan to buy into the partnership. This is often the case at smaller law firms where finance is required to ensure cashflow is not disrupted. Financing in this way can be structured as a capital account, paid down over time when you generate fees as a partner.

Partners in time: get wealth planning advice early

Whatever the issues presented as you step up to be a law firm partner getting the right advice and wealth management planning in advance are key. If you engage an adviser prior to becoming a partner you’ll be in a better position to navigate the financial opportunities and risks that will inevitably come your way.

According to Glassdoor the average partner starting salary in a UK firm tops £88,000 and this annual figure can rise dramatically over time. Add almost £20,000 in bonuses – sometimes far more – on top of this and you can clearly see why financial management advice is a must.

ADL is home to extensive expertise and experience under one roof, relating to all of the aspects outlined above and more including:

  • Insurance: critical illness, income protection and more
  • Pensions planning and ongoing management
  • Employee benefits
  • Intergenerational wealth transfer

Our mission is to provide bespoke wealth management planning that suits your specific circumstances, and support you to make sure the devil in the financial detail doesn’t undermine your progress as a law firm partner.

For more information or to book a free introductory consultation, contact our team today.

Navigating Inheritance Tax: Expert Advice On Estate Planning London

A significant aspect to considering inheritance tax advice in the UK for most affected people is always going to be dependent on property values. Considering London’s population and average property values being the highest in the UK, it presents a unique challenge for effective estate planning in London. This is because the value of a London home can use up one’s inheritance tax exemption entirely. This could present an unintended consequence where asset rich, cash poor families would need to sell a home to pay the inheritance tax bill or pay high rates of interest to fund it.

Estate planning in London intertwines the challenge of a greater exposure to inheritance tax with asset illiquidity. Without inheritance tax advice families risk their ability to retain an income generating asset that can improve the financial well-being of beneficiaries. Therefore, inheritance tax needs to assume a pivotal role in the financial narrative of parents and children alike.

Overview of Inheritance Tax

Inheritance Tax is a 40% levy on a deceased person’s estate applied when assets pass down to lineal descendants. The estate compromises of everything you own; property, investments, cash, personal belongings but it excludes money purchase pensions and assets that qualify for business relief.

Every person has an allowance on which they can pass down assets without paying Inheritance Tax. This is called the standard Nil Rate Band (NRB) and it is £325,000. A married couple can utilise the inter-spousal exemption meaning the NRB passes to the surviving spouse on 1st death and the combined NRB value of £650,000 can be used before any tax is paid when the surviving spouse passes away.

An additional Inheritance Tax allowance called the Main Residence Nil Rate Band (RNRB) can be used when a primary residence is passed on to direct descendants, such as children or grandchildren. The RNRB is £175,000 and the inter-spousal exemption can be used meaning a total of £1,000,000 of allowances is available to married couples. One needs to be mindful, however, that the RNRB tapers away for estates valued over £2M.

Estate planning in London is complicated by lofty property valuations combined with the likelihood that mortgages will be (and should be) paid off in old age and by the time Inheritance Tax is due on death. Should mortgages not be paid off or there not be an appropriately structured insurance policy in place, the lender will eventually demand the repayment of their loan, which could require the sale of the property, which may trigger Capital Gains Tax at rates as high as 28%. Should you die a few years later, those unspent sale proceeds could then be subject to inheritance tax at 40%.

 

There are several ways to reduce or manage your exposure to inheritance tax, and it goes without saying the best time to start estate planning in London is yesterday but seriously you should be obtaining tax planning and financial planning advice from the moment you realise you are building wealth. This is because the decisions you make whilst you are building wealth could ensure that you are structuring your wealth in the most tax-effective way from day 1 which could avoid expensive planning solutions later in life that could amount to tens of thousands in advice and implementation fees.

Here’s 6 effective estate planning in London strategies to consider

  • Put in place specialist wills and multiple trusts with expert trustees
  • Put in place correctly structured life policies; this is more than assigning your life policy into trust.
  • Set up a clever alphabet share company structure from day 1 of your property investment portfolio.
  • Gift strategically during lifetime.
  • Don’t just think of a pension as a retirement planning vehicle but also as a succession planning vehicle.
  • Diversify your investment holdings and your tax wrappers.

In conclusion, navigating inheritance tax in the UK is a labyrinth, with estate planning in London presenting additional challenges due to higher property values. Therefore, meticulous planning to ensure optimal wealth preservation for the next generation is crucial.

Degree Of Success: What We Learned from Helping Law Graduates with Financial Literacy

In a recent blog we reflected on the fact that the UK struggles with financial literacy – across all generations, and in all sections of society.

In fact, studies show that almost three-quarters of British people find it hard to get their minds around money matters. In turn, that leaves individuals’ wealth at risk of being badly invested or simply frittered away if people can’t or won’t seek the right financial advice.

It seems like the public is coming round to the need for better financial literacy. According to a recent report about the current school curriculum by the Laidlaw Foundation – flagged up in The Times – 94% of parents believe educators have a key role to play in helping children learn life skills, not least managing their finances.

In addition, 40% of parents named financial literacy as the most important life skill – and almost twice as many said such skills are more important to their child’s future compared to preparing them for further academic study (i.e. further and higher education).

There’s lots of work to do to chip away at the causes of poor financial literacy in the UK – and it’s our mission to do just that. Nor does the job stop when school’s out; adults still need support managing their finances.

To that end, Prajesh Patel – ADL Wealth Director, Private Clients – was invited to run a series of online seminars with an audience of university graduates working at law firm Fieldfisher. The sessions covered a wide range of topics, from creating an ‘emergency fund’ and budgeting, to setting goals, investing and thinking differently about credit.

We asked Prajesh to discuss his experience of helping these young people to improve their financial literacy and wealth management – and discovered he also learned a lot from the three sessions.

Which areas of finance that you covered seemed to be of most interest to the graduates?

I received the most questions around credit cards and credit scores. Credit and debt management is an area I might have learned about earlier. That was the overall theme of the seminars: what I wish I’d known when I left university.

Information around this is relatively scarce, and in some cases, confusing to understand. Credit also comes with a stigma attached. It’s seen in some quarters as simply building up debt, and therefore problems for the future.

But I think it’s one of the critical areas of financial literacy and wealth management. When the graduates come to apply for a mortgage, or in some cases a loan, they will need a credit rating. There’s no difference between using your current account or having a 0% interest credit card to pay daily outgoings – like shopping or bills – and getting used to paying it off automatically each month.

As long as you budget properly, and it doesn’t spiral out of control, you’ll also get a good credit rating, which will help in the future.

Were there any other surprises in the audience’s response to the topics you discussed?

There were only a few questions about investing. That surprised me. Perhaps the audience has a good understanding of it already. There’s a lot of information available in this area so self-teaching is easier than, say, for credit and debt.

But it’s still important to remember that some of the information is bad advice. Look at the number of property investment courses that have sprung up in recent years. Some of those, when scrutinised properly, are not going to make people as wealthy as fast as they claim.

Then there’s the interest in cryptocurrency investment returns among younger age groups in particular. That’s still a relatively unregulated market and you should definitely do due diligence and seek advice before committing money to it.

Was this the first time most or all of the graduates had interacted with a financial adviser?

Yes, that was one of my key insights from the seminars. It seems I was the first person attempting to give them the tools they need to navigate a complex financial world.

I think there are three reasons for this. One, regulated advice is rarely available on social media where this audience goes for a lot of its information. Two, their parents may also not have accessed financial advice, so the knowledge they can pass on is limited.

And three, it’s easy to think when you just have a couple of hundred pounds of spare cash per month that a wealth manager wouldn’t be interested in talking to you. But we’re always happy to help! Especially if it means you don’t fall into the pitfalls of bad investment choices, which I covered earlier.

You mention finding financial content on social media. Do you think technology can help improve financial literacy for the graduates’ generation and those that follow?

Some people will always be better than others at using tech and finding reliable sources, no matter their age. But I do think young people today have a better chance to get the knowledge they need, because they are more proficient with technology, and have instant access to so much information.

There are lots of financial advice apps out there – ADL’s My Finances for one – and they’re usually pretty good. Hopefully technology will have an impact on financial literacy in the future, too.

Did you leave the graduates with some sage advice about what they can do to improve their financial situation from now on?

I think it’s a case of building their knowledge of financial matters gradually. Pick an area, read up on it and seek advice where necessary. Based on their feedback about the seminars, which was overwhelmingly positive, there’s clearly a demand for better financial  education so that’s a drum ADL will continue to beat.

Here’s a summary of what graduates can do – though most of these are also applicable to all of us:

  • Structure your financial goals: find out more here
  • Use (and regularly pay off) a credit card to build your credit score
  • Budget well by using an app to help you
  • Build an emergency fund before you invest
  • When you decide to invest – diversify
  • Make sure you use tax wrappers e.g. ISA/pensions
  • Pay off your student loan as early as possible

To find out more contact ADL using the form below. You can also keep track of Prajesh’s advice on learning how to manage your finances on social media:

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When is the right time to seek financial advice

man standing infront if building

WHEN IS THE RIGHT TIME TO SEEK FINANCIAL ADVICE?

It’s a question we get asked a lot – in a market where misconceptions and bad advice are rife.

The better question might be, is there ever a bad time to ask for financial advice? Because the answer is always a resounding: “No”.

In fact, there’s a strong case for saying that individuals need help with wealth management now more than ever. At all levels of society, the complexities of managing our money, and the seemingly endless changes to regulation of tax and other assets, is leaving people confused.

This study featured in IFA Magazine reveals almost three-quarters of Brits struggle with it. And that means most people probably won’t be aware that good financial management isn’t something you can simply leave until later in life. Or that poor decision-making (or believing bad advice) can have disastrous consequences. Perhaps even worse, you’re far more likely to fall foul of fraudsters if you don’t wise up about bogus investment opportunities.

But most of all, you’ll lose a prime opportunity to protect your lifestyle, preserve and grow wealth with the simplest – and cheapest – planning available.

Regardless of your age, professional seniority, existing wealth and personal values, seeking advice is the first step towards sounder finances. There are three stages to tick off so that you can do this, and there’s no reason why you can’t start now:

1. A wealth management mindset shift

Contrary to popular belief, a good adviser’s contribution to your personal and family wealth goes beyond what’s listed in your client agreement.

It’s the detailed answer to your question on a particular protection plan, investment option or tax quandary. It’s an insight into shareholder agreements, knowing the consequences of selling a business, and being conversant on trusts. And it’s about the resourcefulness of an adviser who can wrap in the right experts to soothe your pain points – even those which weren’t on your radar.

The first building block in firmer financial foundations is a shift in mindset about the purpose of wealth management. We’re not here to make you rich (or richer). We won’t focus solely on investment performance, like most advisers do – because there isn’t much we can do to manage the markets.

What we can do is put in place optimal principles, tailored to your unique individual circumstances, that:

  • prioritise your concerns
  • promotes your values
  • protect your lifestyle
  • prevent costly mistakes
  • preserve more of your wealth

2. Taking stock of your financial situation

To help us work out the opportunities and threats to your wealth’s wellbeing it’s useful to answer the following questions – and consider when’s the best time to engage us:

  • Do you have sufficient emergency cash? If not, build it and come back to us.
  • Do you have appropriate protection plans? If you don’t have these in place, we may be able to help you directly or point you in the right direction.
  • Are you aware of how your Death In Service (DIS) employee benefit can impact your inheritance tax (IHT) and succession planning? No? The good news is that the monies paid out into the estate are IHT-free as the DIS is already held under trust. However, the issue arises on the eventual death of the beneficiary at which point unspent funds would be liable to generational IHT. Furthermore, because the funds have exited the trust and not been loaned from it, this exposes the DIS proceeds to a range of third-party threats.
  • Do you have an idea of your capital needs over the next five years? Great – that’s the amount you can’t afford to risk.
  • Have you thought how much income you need in retirement? If the answer is no, you need some coaching.

3. Spend some time charting your life plan

With the best will in the world, your financial adviser may struggle to make their expertise count unless you provide some vital information upfront.

Don’t worry, we don’t need chapter and verse at the outset. This is about creating a conversation aid that gives us an overview or your current financial details, your dependants and your dreams.

There’s obviously far more we’ll need to know in due course, but we wouldn’t expect you to come armed with all of the information when we first speak. An initial helicopter view of your situation is enough to provide insight into the amount of capital you’ll need, set against your level of disposable income today.

This enables us to explore your financial hopes and concerns more thoroughly, together with you. If you’re unsure where to start, ADL’s My Life Plan Chart is an excellent tool to sketch out your plans for the short, medium and long-term future, in areas that include your family, career, property and plans for retirement.

Cases in point: three clients we’ve helped

Here’s a quickfire look at just three people we’ve helped.

A healthy plan

Our client and his wife, both 70, have a main residence valued at £400,000 and nine investment properties valued at £1m altogether. They also have ISAs of £300,000; pensions worth £550,000; and a joint life policy for £120,000.

Concerned about their health and using rental income as a primary source of funding their retirement, they wanted to tackle a £328k IHT liability to help their beneficiaries.

In response, we have identified surplus income; arranged specialist wills, trusts and Lasting Powers of Attorney; and determined the best way to reduce IHT and redirect surplus rental income, via an equity settlement into trusts and holding over the gain on the properties into the trust, as per s.260 Taxation of Chargeable Gains Act 1992.

In addition, we reviewed the couple’s existing pensions. We determined that by reducing the overall charges without compromising on investment strategy, sufficient rental income could be given up. The amount of rent given up was associated with the equity settled into trusts.

Tour de force

We helped a non-resident, non-domiciled director and shareholder of a successful, UK-based tour operator company holding >$2m ‘surplus funds’ in cash. 

He prefers not to repatriate the funds to his own, politically volatile country. His key objective is to lower the IHT bill on the business cash to protect the cascade of wealth to his children and grandchildren.

We considered an Excluded Property Trust and a Qualifying Non-UK Pension Scheme (QNUP) to ensure the funds would come under a strong financial services jurisdiction – outside of the UK IHT regime.

Ringfenced retirement

A 79-year-old, divorced farmer wanted to protect her wealth for her two sons – but lived in a farmhouse with 195 acres of land, presenting a potential IHT bill of £2.4m. This was a complex situation where we needed to consider:

  • whether the farmhouse really was a farmhouse
  • if Agricultural Property Relief (APR) applied to the land
  • whether, on sale, the client would lose IHT exemptions

We determined the farmhouse and 25 acres did not qualify for APR. It meant those assets could be ringfenced and sold to help fund the new home she desired as well as her long-term needs.

But the IHT issue remained – so speed and efficiency were key to protect the client’s wealth. Our advice included a wide range of options:

  • Whole of Life insurance policies; it often makes sense for large life policies to be structured as multiple policies of £250k each
    • Strategic settlements into discretionary trusts during lifetime
    • Flexible Lifetime Annuity via a Protective Cell Company

We set out the cost-effectiveness and the risks of various options. For instance, the risk of the client not surviving for seven years. But we ultimately determined the cheapest option inclusive of all fees; not just our advice fees, but also related-product provider fees, would be significantly lower than the IHT bill.

These three client stories exemplify the breadth of opportunity on offer from detailed and prudent financial planning. It’s also worth noting in the ‘farmhouse’ case, if the client had sought our advice sooner, her savings would have been greater…there really isn’t a bad time to seek our advice.

To book a free 30-minute consultation and to ‘MOT’ your finances today, fill in the below form or make an appointment on Calendly

High earner, high pressure? Investment options for bigger incomes

With statistics revealing the mean salary for employees working in the UK’s financial services sector is a third higher than the national average across all industries, it’s safe to assume senior roles come with big rewards.

The average UK pre-tax salary is around £32,000; in financial services, it’s more than £43,000 – and that’s before you throw in bonuses, which are a big pull for people to build a career in the sector. Only utilities-related professions seem to have higher earning power, according to the stats.

If you’re lucky enough to work in a role that provides you with a high level of financial security, you should closely consider the best options to maximise your money. Well-thought through wealth management is key to maintaining the lifestyle you’re used to, plan for your retirement, and look after your loved ones.

We regularly help individuals working in financial services who don’t have such a strategy in place. This is often due to them lacking the time to investigate the possibilities of wealth management. But it’s also because of the complexity of financial products and regulation, which understandably puts some people off discovering more about this ‘money minefield’ when their job is complicated enough.

How to make your wealth work harder for you

Fortunately, there are lots of ways to make your wealth start to work harder for you, and for your family. Here’s a whistle-stop tour of just a few options we can help you with:

Pensions and ISAs – These are the products our clients are most likely to have explored, either through payroll or privately. They offer useful levels of tax relief, and they’re relatively simple to put in place and manage.

For example, high earners would usually fall into the 40% or 45% tax bracket. As ISA withdrawals are tax free, utilising the allowance shields wealth from high income tax. It’s all about ensuring you’re receiving the right advice to maximise your allowances.

Alternative tax wrappers – A commonly used phrase which might not mean much to individuals who aren’t involved in wealth planning, even some of those working in financial services. But understanding tax wrappers, and which will work for you, is vital to make your investment portfolio as efficient as possible – particularly if you’re already using up pension and ISA allowances.

Beyond ISAs and pensions, you can access other beneficial products such as offshore investment bonds – for example – which benefit from gross roll-up, meaning no tax within the fund. If it was an onshore bond, the gains are taxed at 20% within the bond: it’s a tax the UK fund needs to pay to HMRC. In contrast, an offshore bond is located in a tax-free jurisdiction so the gains can “roll up” without a 20% charge.

It’s vital to always seek investment advice to determine suitability, as potential withholding taxes must also be considered – alongside, of course, extracting any gains from the bond when you need to.

VCTs/EIS – Venture Capital Trusts (VCTs) are an exciting way to manage your wealth. These are tax-efficient collective investment schemes designed to boost UK start-ups and scale-ups while providing income and capital gains for investors, in exchange for the increased risk you’re taking on.

The Enterprise Investment Scheme (EIS) is similar. For 30 years, investors have been able to fund small businesses in the UK via the scheme. Typically, they are sub-£15m in gross assets and privately owned (although some list on AIM). Tax-free growth, income tax relief up to 30%, and even inheritance tax breaks are among the rewards for investors.

Is home really where the heart is?

Those are some of the investment alternatives any serious financial planning adviser should recommend, but let’s turn our attention to another that splits opinion: property.

For the past 25 years or more, there’s been a trend for high earners to plough investment into property such as housing stock. It figures – interest rates had been unusually low for two decades, and at least at the start of that cycle average house prices were far more attractive than they are now.

If you took advantage of this environment years ago, you’ll now be reaping the rewards. But property investment today comes with many warnings. Buy-to-let landlords – a trend encouraged by ubiquitous property management courses, proclaiming anyone can snap up and manage a portfolio – are beginning to encounter higher interest rates, struggling tenants and the introduction of Section 24 of the Finance (no. 2) Act 2015, meaning mortgage interest can no longer be deducted as an expense by landlords.

The profitability of property has been vastly affected as a result. Buy-to-let also contributes greatly to the nation’s inheritance tax bill, something which might not be apparent when you’re starting out.

In other words, think before you leap into this popular option. And if you do own property – whether it’s your own or a portfolio – consider using your wealth to pay down the mortgage. Most fixed-rate products allow 10% annual overpayments. The return is the interest rate of the mortgage, and it’s guaranteed. It could be an attractive option while interest rates remain stubbornly high.

ADL is on hand to help high earners make the decisions your wealth demands, to make your money work harder for you. Book a free consultation  with us today.

Business Succession Planning: Don’t let death cast a financial shadow on your fellow Directors and family

While many SME directors die unexpectedly every year, surveys put the figure who have comprehensive business succession plans in place as low as 8%.

This is a big mistake. The earlier you begin business succession planning, the better. Leave everything to chance and there could be devastating consequences not just for your loved ones and beneficiaries in general, but also for your fellow directors.

Here’s an unhappy scenario, but one that bears scrutiny. A male director owns 49% of his SME’s shares; his female friend and co-founder holds the remaining 51% stake. Sadly, the minority shareholder dies suddenly – and his family members and co-director discover there was no plan in place to handle that eventuality.

This puts additional stress on the shoulders of everyone involved, even as they deal with the grief of his passing, and the problems also begin to affect the rest of the business.

Here are some of the reasons why such a lack of business succession planning could leave your legatees in a difficult position:

Keeping the firm going – While the surviving director in our scenario still maintains majority control, she now has the headache of accommodating the new 49% shareholders. Often, this is a direct family member of the director who passed away. They usually have little to no experience of the business, or the market in which it operates.

At best, this situation takes time and negotiation to resolve, perhaps shoehorning the new director into a position no party wants. At worst, it can cause strife – if, for example, the majority shareholder begrudges their new business partner an almost equal stake in the business for minimal input. It has been known for major shareholders to decide not to distribute dividends in such circumstances, causing further pain.

Trust in the process – One of the most regular oversights by company directors is not writing a business trust into their will. To qualify for 100% business property relief, shares of a business intended to be a going concern after a director’s death must pass via the “legacy” clause in the will to a specific beneficiary, as per S39A Inheritance Tax Act 1984. That specific beneficiary should be a trust.

If the assets are left via the “residue” clause the relief would be shared against the whole estate, which would otherwise be exempt due to benefiting other exemptions such as spousal or charity exemptions.

Not only can this give the shares 100% exemption after someone passes, it can also help future-proof against other issues such as divorce, inheritance tax and a widow/widower’s remarriage after death. This significantly improves the sustainability of the business across generations.

Don’t get cross, get cross-option – How will the deceased shareholder’s family and the company’s other shareholders be fairly compensated for their relative stake in the business? This is a highly complex area, but has a relatively simple, satisfactory and water-tight solution – a cross-option agreement – if you get the right advice.

After a director’s death, their shares should initially pass into a business trust – the beneficiaries of which are usually the late director’s family members. Meanwhile, the surviving director benefits from a life insurance pay-out – if a policy was in place – that is paid into a shareholder protection trust. But if the wrong life insurance policy was bought, the deceased director’s shares are effectively cancelled, and their value lost.

With a cross-option agreement the surviving shareholder can instead use the shareholder protection trust funds to buy the shares from the business trust. The family of the late director is compensated, no longer needs to worry about the shares, and the surviving director can realise the full value. Usually, this happens when they eventually exit. If the steps have been correctly followed – with the business succession plan firmly in place before the director died – this can have a big bearing on aspects of taxation such as Business Asset Disposal Relief and Business Property Relief working in the survivor’s favour.

For sure, business succession planning is a minefield. The main thing to take away is that it’s never too early to plan – but it can be too late to leave a consolatory, not complex legacy.

Whatever the stage of your business, it’s crucial to take a step back and consider the requirements of the company going forward should the worst happen. ADL helps scores of directors plan for the future, balancing your current lifestyle needs with ongoing considerations as the firm grows: from setting up in multiple markets, to rolling out benefits that keep employees engaged, always focusing a firm eye on the future.

You can find out more by watching this video. For a free initial hour-long consultation on succession planning for your business, where we’ll discuss in depth your current situation and potential future scenarios and solutions, please contact ADL Estate Planning today.

For press enquiries and further information on your own wealth management plans you can reach out via the contact form or schedule a call via the Calendly widget (30 min initial enquiry option) below: