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:

LinkedIn

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What is the ADL Advice Guarantee?

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We guarantee our advice and implementation fees will be the most competitive in the market based on the following criteria:

 

  • The expertise of your lead adviser i.e. holding at least STEP membership and regulated financial planning qualifications or a private client solicitor holding at least 5+ years post qualification experience in private client advice. The solicitor may not hold formal regulated financial planning qualifications but will be conversant on relevant complementary financial planning needs and thus involve a suitably qualified and experienced colleague.

 

  • The procedure of the advice given which includes, a free initial consultation process; the initial call/zoom session that often lasts an hour, post-session research, a strategy email or report (where needed). All without a charge.

 

  • Post implementation support and guidance without charge. We will not charge you a fee to re-open your case file and review the planning implemented several years prior. We will not charge you a fee to explain the planning we’ve put in place to your children several years down the line when they are now old enough to be able to comprehend it.

 

  • The actual implementation of the solutions.

 

  • If you’ve been given a “cheaper” quote. We’ll review any solution you’ve been given, providing you with a commentary free of charge. If the actual implementation cost is cheaper, we’ll consider matching it if you really prefer to work with us. At the very least, you can rest assured whatever planning you have decided to implement has been one that you’ve decided to implement with eyes wide open.

 

  • Finally, the ADL Advice Guarantee mandates ADL Estate Planning Ltd to be a corporate member of the Best Foundation, which offers it’s own attractive Client Guarantee, inclusive of independent arbitration. You can read more about this here: https://bestfoundation.org.uk/about/client-guarantee/

 

I’m confident our ADL Advice Guarantee is something that will reassure all our prospects and clients. This is also in addition to at least £2M in professional indemnity cover we have in place for all estate planning work we undertake. Do note, any regulated financial planning work is undertaken under our ADL Wealth brand and any tax reporting work is also covered by appropriate levels of professional indemnity cover.

We look forward to supporting and welcoming you and your family into our ecosystem so we can provide you with some of the most important areas of professional advice you’re ever likely to receive.

Should you have any questions about this advice guarantee, you can reach out to me directly.

 

Mohammad Uz-Zaman MA Adv DipFA PETR CeRER CeLTCI

Chartered Alibf (STEP Associate)

Private Clients

Managing Director

Email: muz@adlestateplanning.co.uk

Dear Judges, the McCloud judgement gives you an intergenerational wealth transfer opportunity you need to know about

Circuit judges and pension changes

Pensions are among the most complicated tax wrappers we have in the UK. There are many different types of pensions, and each have their own unique criteria. Even I as a professional, with over 15 years in financial planning including as a senior adjudicator, holding advanced pension qualifications including Chartered status must remind myself on the intricacies of certain types of pensions that I don’t come across every day. However, I try to take comfort in that I know what questions to ask and what must be considered when unfamiliar legacy plans come across my desk.

The first thing you need to know, and this applies to those who aren’t judges too, if you have an occupational pension plan, your pension payment is taxed under PAYE before you receive it. This means you will be liable to UK tax even if you become non-UK resident in retirement. This contrasts with a personal pension or a Self-Invested Personal Pension (SIPP) which will suffer local tax rates. Therefore, should you become a resident in a lower tax jurisdiction in retirement, you could access your personal pension or SIPP with little or no tax consequences.

The second thing I’d like you to know is when we use the word “pension”, it can have several meanings, for instance, the value of the underlying fund or the actual income you receive or are due to receive from the pension provider.  In this article, when I use the word “pension” I’m referring to pension income or merely the all encompassing tax wrapper.

The History

This all stems from the long-foregone coalition government who in June 2010 had established an Independent Public Service Pensions Commission to look at “the long-term affordability of public sector pensions, while protecting accrued rights”.  In March 2011 the Commission recommended the following:

  • replacing the existing pensions which were linked to the members final salary to one that was linked to career average earnings.
  • increasing the pension commencement age to align with the state pension age for all schemes except the armed forces, police and fire services which would have a pension age of 60.

The Government accepted these reforms, and they were legislated into the Public Service Pensions Act 2013 which became a framework for new schemes introduced from 2015 (2014 for local government). The idea being the various public sector schemes would go on to attempt to manifest this framework in their new pension schemes for their employees to ensure the long-term sustainability of the traditionally lucrative public service pensions.

However, the manifestation of the framework on the new judges’ pension would go onto have severe ramifications across ALL public sector schemes. So, what happened?

On 1st April 2015, a New Judicial Pension Scheme (NJPS) was introduced, membership of which was less attractive than the original Judicial Pension Scheme (JPS). To reduce the negative impact of the NJPS on those closer to retirement there were transitional provisions. Those provisions allowed judges to remain members of the JPS by reference to their date of birth if it was better for them.

  • Existing members of the JPS who were born on or before 1st April 1957 would have full protection, could continue in the JPS. Ultimately, the potential benefits under the final salary JPS would be compared with the career average scheme and whichever was higher would be paid. This was the original “statutory underpin” protecting the older members.
  • Existing members of the JPS who were born between 2nd April 1957 and 1st September 1960 are entitled to time-limited protection.
  • Those born after 1st September 1960 weren’t entitled to any protection and were excluded from active membership of the JPS.

Key Points

  • The original JPS aka Judicial Pension Scheme 1993 aka JUPRA as it was established under the Judicial Pensions and Retirement Act 1993 was an unregistered final salary pension scheme. This meant that although the pension contributions didn’t attract tax relief, contributions were not limited to the annual allowance or lifetime allowance limits. This meant judges could have a separate registered pension scheme that they could also fund without penalty. Whether they took this opportunity is another matter. Other features included (not exhaustive):
    • An accrual rate of 2.5% (1/40th) of pensionable earnings.
    • Normal Pension Age of 65 years.
    • Automatic lump sum on retirement at rate of 2.25 times the annual pension

 

  • The NJPS was a registered pension scheme, this meant pension contributions would be limited by the annual allowance and the lifetime allowance. This scheme was based on a career average basis rather than the final salary basis. Other features included (not exhaustive):
    • An accrual rate of 2.32% (1/43.1th) of pensionable earnings.
    • Normal Pension Age linked to state pension age.
    • Optional tax-free lump sum based on a commutation rate of 12:1. This meant for every £12 of cash, £1 of pension would need to be given up.

The McCloud judgement

Some of your colleagues, those who had limited, or no transitional protections weren’t happy with the transitional provisions. They brought claims to the employment tribunal (i) alleging direct discrimination on grounds of age (ii) for equal pay on the basis that the transitional provisions disproportionately adversely affected women; and (iii) alleged indirect sex and race discrimination. The government didn’t dispute the provisions discriminated based on age but argued that it was justified as a proportionate means of achieving their aims.

There were similar claims made in relation to the firefighter’s pension scheme but both employment tribunal cases led to the McCloud judgement in the Court of Appeal, and following 5 hearing dates, in December 2018, the Court of Appeal stated that the ‘transitional protection’ offered to some members as part of the reforms amounted to “unlawful discrimination”. Then in July 2019 the government accepted that difference in treatment would be remedied across all public service pension schemes regardless of whether individuals made a claim.

In July 2020 the government launched a consultation proposal to build the remedial action in relation to the McCloud judgement. The government response, now known as the McCloud remedy, was issued in February 2021. Here are the key points (not exhaustive):

  • Eligible members which now included qualifying younger members would now be given a legacy or reformed pension scheme benefits in respect of their service during the period between 1st April 2015 (1st April 2014 for local government) and 31st March 2022 (the remedy period).

 

  • The choice would be made at retirement, or just before the benefits come into payment.

 

  • In the meantime, members will be deemed to have accrued benefits in their legacy schemes for the remedy period. From April 2022 all active members would be transferred to the reformed schemes for future service.

Ultimately, it would be down to each public service pension scheme provider to determine how to implement the McCloud remedy when their own schemes faced a potential age discrimination issue.

McCloud remedy and the judicial pension

To qualify for the remedy members would need to satisfy the following 5 conditions:

  • They have service that takes place in the period beginning with 1 April 2015 and 31 March 2022 – this is known as the remedy period;
  • The service is pensionable under a judicial scheme;
  • The member was in a pensionable judicial office or a pensionable non-judicial public office on or before 31 March 2012;
  • There is no disqualifying gap in service (a period of five years or more);
  • The member was aged under 55 on 1 April 2012.

If you’ve been the affected, the Ministry of Justice (MoJ) will contact you first with a Preliminary Information Statement (PIS) to confirm the data they hold about your pension service, which you need to respond to within 2 months. You’d then be sent an Information Statement with an options exercise with a comparison of the estimated benefits you could’ve received under the various options during the remedy period. You need to respond to this within 3 months.

The Judicial Pension Scheme (JPS) 2022

From 1 April 2022, all members eligible for a judicial pension joined the Judicial Pension Scheme 2022 (JPS 2022), unless they opted out.  JPS 2022 is an unregistered Career Average Revalued Earnings (CARE) scheme. The pension being the average of your pensionable earnings throughout your membership of the scheme. Other features include:

  • Member contribution rate of 4.26% of pensionable earnings
  • Accrual rate of 2.5% (1/40th)
  • No cap on the number of service years
  • Normal Pension Age linked to the State Pension Age

Why this matters for you?

As judges you’re likely to be a higher rate or a top rate taxpayer. Over the years you are also likely to have built wealth that could now be liable to inheritance tax (IHT).

You should be thinking about intergenerational wealth transfer and asset preservation. This is where you can take advantage of registered pension schemes whilst still being a member of the JPS 2022.

Therefore, any surplus income can be saved into a registered personal pension or a SIPP. This will give you income tax relief at 40% or 45%, which is a highly tax-efficient way to build up additional capital. For example, £1,000 per month in a registered pension would only cost a higher rate taxpayer £600 and a top rate taxpayer £550. You could invest £60,000 per year into a registered pension and that would only cost you £33,000 as a top rate taxpayer.

If you’ve been a member of a registered pension from previous years, then you could potentially also benefit from carry forward. This is when you have not utilised the full annual allowance from the previous 3 years, and in the current tax year you’re able to “carry forward” those unused allowances to make a larger contribution into the registered pension scheme.

The magic of the registered pension is that it can be inherited by your beneficiaries tax-free should you die before age 75 or be only subject to your beneficiaries’ marginal rates of income tax if you die when you’re over 75. Crucially, registered pension schemes are not subject to the 40% IHT.

What could potentially be even better, especially where you have non-taxpaying beneficiaries such as grandchildren, is passing your registered pension into a Pension Death Benefit Trust (PDBT). This should be undertaken with a carefully worded contingent nomination. A decision to be confirmed on death.

Now, although the trust would suffer an immediate 45% tax on entry, this tax can be reclaimed when it’s advanced to a lower tax paying or a non-tax paying beneficiary. This does mean only 55% of the pension trust fund can be invested.

The PDBT allows for protection against third party threats your beneficiaries could face such as remarriage of the surviving spouse, divorce settlement claims, care costs, creditor claims and generational inheritance tax.

Intergenerational Wealth Management requires multiple disciplines and it’s crucial it is done correctly. You can download our e-book – Winning at life:       Welcome your future, maintain your assets, secure your capital, safeguard your family and plan for your future legacy via the following link: https://adlestateplanning.co.uk/winning-at-life/

Should you be interested in a consultancy call, please book in a slot.

Mohammad Uz-Zaman is a chartered private client wealth manager who holds accreditations across regulated financial advice and estate planning. He is also an associate member of the Society of Trusts and Estate Practitioners (STEP). He works closely with financial advisers, general practice solicitors, accountants and investment managers from several major practices. Should you be interested in exploring a B2B relationship please email Mohammad Uz-Zaman directly at muz@adlestateplanning.co.uk.

 


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

My Finances: App Launch Drives ADL’s Mission To Boost Wealth Planning

You might have felt this frustration a few times: go to your app store, search for wealth planning advice, get bombarded with complex options – none of which does exactly what you need, all in one place.

With such disparate personal finance information to sift through it’s no wonder many people shrug their shoulders when it comes to financial planning. According to research, only around 1 in 3 (37%) declare themselves ‘full planners’: they have financial goals, and a plan in place to achieve them.

Put into context, that’s approaching 30 million over-18s in the UK who haven’t committed to wealth planning.

This might all sound like someone else’s problem. In reality, it gives us as a country a big problem. Consider some of these stats:

  • 39% of UK adults don’t feel confident managing their money
  • 63% actually believe they have no control over their finances
  • 11.5 million have less than £100 in savings
  • 55% find pensions too baffling to be able to save well for retirement
  • 43% of pensioners are not engaged with how to manage residential care costs

The list goes on. By putting ourselves in this position, we’re collectively contributing to a society that isn’t financially literate and doesn’t enjoy the benefits that better wealth management can bring: a more efficient economy, effective services; basically, a better place to live.

Our wealth planning problems start at an early age. Only around half (52%) of children aged between seven and 17 claim to have had any meaningful financial lessons – and plenty of them pick advice up from family rather than in the state or private school system.

So, if society isn’t set up to make us all better at wealth planning driven by a greater level of financial literacy, for everyone’s benefit, then someone needs to take matters by the scruff of the neck.

At ADL we’re doing our bit. After years of planning and development, we’re unveiling our new, comprehensive wealth planning app: My Finances.

The app – initially available for Android devices, with iOS to follow soon – brings together a wider range of wealth planning calculators than any other tool. There will be 10 to start with, letting you tot up inflation impacts, consider equity release, understand investment gains, double your money, and make other easy calculations.

But it will also, uniquely, offer one-to-one access to a network of our partner wealth planning advisors. They cover aspects of financial planning spanning mortgage payments, pensions, commercial finance, accountancy and more.

Perhaps most importantly, as ADL and our collaborators seek to change the way the UK thinks about and manages money, My Finances will offer a full programme of coaching sessions, webinars and other content to build users’ financial knowledge with easy-to-consume, knowledge-building insights.

We’ve launched a landing page to share more information about the app and what it can do for you. We’ll make My Finances more visible on app stores and online via some exciting marketing initiatives. We’ll be contacting potential users to bring more people on board – and start to make the change we want to see. As our developers continue to work hard, and the app builds momentum, we will roll out further features to subscribers.

We’re committed to building a wealth planning ecosystem that supports our vision of a fully financially literate UK. As individuals, and a society as a whole, that can be a priceless contribution to a prosperous financial future.

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: