Legacy planning for your family and business

Which generation is the UK’s luckiest financially?

It could be Baby Boomers, who have collectively amassed £5.5bn in assets according to Abrdn.com. Or maybe it’s set to be Millennials as they stand to collect more than £1bn of that wealth in this decade alone.

Intergenerational wealth is a regular hot topic of debate. That won’t change as we approach a General Election, and issues such as getting on the housing ladder and the cost of living continue to make headlines.

But whatever the source of your wealth, you’re entitled to protect it and make it work as hard as possible. Often, that doesn’t mean thinking only of how your loved ones will benefit when you die. It might bring into to play other aspects such as your business interests that you’ve built up over time.

Leaving a legacy can be a legal nightmare. In this article we’ll give you an expert view on how to plan for final financial matters, and ensure that your wealth – and the benefits it brings – lives on.

Under one roof: legacy planning for family

Consider the challenges that you’ve faced, and those which confronted your parents, your extended family and your grandparents. Perhaps you’ve seen your relatives struggling to invest in education, career, business; maybe you’ve even witnessed creditor claims that may have arisen due to the loss of a key family member, because of their premature death.

Now imagine life throwing the same obstacles in the path of your children – but this time the wealth you’ve left behind has been ring-fenced.

Strategic intergenerational wealth planning takes into account your financial assets, including land and property, businesses, stocks and shares, and any beneficial interest you may have in inherited wealth or lifetime settlements made by family members.

Effective planning helps to protect and secure the transfer of economic resources and their benefits from one generation to the next, giving them firm financial ground to make the most of their lives.

Unless wealth is managed carefully and strategically, it can be eroded remarkably quickly – not least by the burden of inheritance tax – meaning financial struggle for future generations.

Property, of course, is a huge factor. It plays a crucial role in intergenerational wealth due to its potential for long-term value appreciation and income generation. According to data, over-50s in the UK hold 78% of privately held housing wealth – and it must eventually find a home somewhere else.

That’s why effective wealth management involves assessing each property’s value, potential for growth and income-generating capabilities. Regular property evaluations and understanding market trends are essential to make informed decisions around property, as part of your overall wealth strategy.

Wealth managers can collaborate with families to ensure smooth property transfers to the next generation. We address legal aspects, minimise taxes and resolve potential disputes. It’s worth establishing structures like family trusts to facilitate the management and control of property assets.

Going concern: leaving behind business assets

Surveys suggest that only around a third (34%) of UK-based business directors already have a succession plan in place.

Business owners have a different layer of challenges – subject to the stage of their business – which must ensure business succession issues are carefully taken into account.

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 for your fellow directors too.

Your options include:

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.

Gift that keeps giving – Consider gifting strategies to share wealth while reducing tax burdens. If you are starting out as a property developer/investor, this would be complemented with a smart company structure involving different share classes where necessary.

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 complex area, but has a relatively simple, satisfactory and water-tight solution – a cross-option agreement – if you get the right advice.

For sure, business succession planning is a minefield. The main thing to take away is that it’s never too early to plan. 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.

No matter your situation, successful legacy planning – from intergenerational wealth management to successful business succession planning – requires a blend of disciplines. There’s much to gain from talking to a trusted adviser who can join all the dots, managing diverse elements of your wealth and resources to sustainably maximise your wealth.

You can read more on estate planning and how to leave a legacy, rather than a headache, in this article. And to book a free e-consultation with our expert team, so that we can discuss your specific requirements, contact us.

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

Corporation Tax: the case for change

The tax contribution made by UK businesses gets a regular airing, given we effectively now have two annual Budgets if you include the Autumn Statement. Yet despite the Treasury frequently tinkering with Corporation Tax rates there seems little appetite to make sweeping changes. And that’s a shame, because a rethink isn’t just needed – it seems crucial to solving many of society’s problems.

Corporation Tax levels have actually bounced around more than you might think. First introduced in the 1965 Finance Act the tax rate was a hefty 40%. Today, it’s roughly half of that with the latest update to the policy being the application of a sliding scale between 19% and 25%, depending on a company’s annual profit levels.

Discuss any aspect of taxation and the conversation usually centres on fairness. Of late, crucial elements of equity such as personal allowance and fiscal drag have hit the headlines as many households try to cope with the cost-of-living crisis.

Income Tax and National Insurance are usually the most scrutinised taxes as they directly affect millions of individuals. But at a time when the role of business in relation to complex societal issues is in the spotlight – from involvement in public service delivery to environmental impact – we should question whether current Corporation Tax is fit for purpose.

That means posing some fundamental questions, including:

  • What is the the purpose of a business in terms of the national interest?
  • What social benefit does a company provide?
  • Should firms be rewarded for positive impact, and likewise penalised for negative social outcomes?

Corporation Tax and the social contract

Corporation Tax isn’t alone in being a problematic part of our taxation system. But its limitations are symbolic of the changing nature of the social contract that exists between government, business and citizens.

That social contract currently exists to provide the foundations of a fair and fully functioning society: security and justice; healthcare; education; welfare; defence; and infrastructure among them. Boiled down, provision of those key pillars represents the ‘value for money’ we receive from public services as taxpayers.

But we should also expect the same contract with companies. In return for being well run and profitable, corporations should treat and reward employees well – and ensure their community values their presence.

Yet as with any tax, if it’s deemed unfair or contains loopholes some of those subject to the rules will – where legitimately possible – try to not pay. So, when we hear the refrain “Why don’t we just charge big business a lot more tax?”, that won’t work either.

In which case, what will? How do we reach a level of business taxation that makes sense, is fair and ultimately ensures all companies can have a real, positive impact on society?

Giving firms credit where credit is due

 One answer lies in setting out a new ‘social impact’ metric as the basis for future business taxation. Since companies have a variety of impacts – positive and negative – on local communities, the measurement system should consider:

  • Business model
  • Company culture
  • Community contribution
  • Local infrastructure needs

Local authorities could be mandated to identify key areas where their communities need additional support. For example, this could be housing, homelessness, sanitation, youth and adult services, crime, and so on – issues I bet you’re aware of in your local area, wherever you live.

A business could be scored against each of the criteria. Critically, their impact might be benchmarked against the local authority’s identified services that need support.

Many firms are already on board with the idea of formalising their impact on society, thanks to changes to governance rules and the emergence of B Corp and similar accreditation. Making your mark in this way can be a differentiator that offers competitive advantage. Implementing the measurement system outlined above would further codify corporations’ impact into something more tangible – and could be directly applied to taxation.

Better-performing businesses, which thanks to the new metrics would be able to demonstrate a positive impact on society, should receive Corporation Tax credits. In turn, that means they’ll retain more of their cash to continue invest in the services, products and actions which are providing the best outcomes.

Followed to its logical conclusion, such investment would take some pressure off purely public-funded services: health, social care, the police, and others.

Reward for better corporate contributions

There are other changes we can make. In my opinion, company directors and controlling shareholders should be made far more accountable for the societal consequences of their firm’s actions than is currently the case.

We shouldn’t stifle entrepreneurship, of course, or stunt the ability to make a profit. But if business leaders are personally invested to take actions that deliver net benefits to society, the tax system is more likely to bear fruit. Directors could be further incentivised with additional personal tax credits.

Put simply, the current tax system does not distinguish between a £100k-profit business that ends up causing £150k ‘damage’ through pollution, increased local reliance on health services, and so on; and another firm that turns a profit of £75k but isn’t responsible for any negative outcomes.

Corporation Tax might not be reformed any time soon – especially with political parties unlikely to want to rock the boat with the powerful business lobby in an election year. But change is something we should all more closely consider in a bid to build a sensible, equitable taxation system. That would offer an alternative to Friedman’s Shareholder Theory in the form of a social equivalent: meaningful contributions for a fairer society.

To find out how ADL can help your business with Corporation Tax planning, tax efficiency in general, as well as business succession, book your free e-consultation with us now.

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.

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.


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.

Clever gifts for children for a secure future

As unwanted Christmas gifts languish in the corner, research reveals the huge investment power of a small pot of money given to children and invested for later life.

Opinium Research on behalf of St James’s Place asked parents of under-18s how much would be spent on Christmas presents for their children. The average sum was £352 per child, with £63 of this being on wasted gifts.

Looking at regional variations, in London 35 per cent of gifts were considered as a waste, while in the East Midlands it was 20 per cent. Overall, this is an estimated total £760 million of unwanted gifts that are disposed of.

Four-fifths of parents found this level of waste to be worrying, with nearly one-third worried about the financial loss, one-fifth concerned about the environment impact and three-tenths unhappy about the example it sets.

What else could the money be spent on?

With one-fifth of children’s gifts purely a waste, is there anything more useful than could be done with the money to benefit a child later on in life?

Putting just £1 per day into a Junior ISA will amass around £11,000 if this is done from birth until the age of 18. By the age of 35, the average age of buying a first home in the UK, the pot would be worth nearly £25,000.

A Junior ISA is one of the most popular ways to save for children. With compound interest paid and no tax payable, small regular contributions mount up into useful capital over the years and can be used for large items of expenditure such as university fees or even a deposit on a house purchase.

As much as £9,000 can be put into a Junior ISA each year, although even smaller amounts will build into a good sum.

When it comes to pensions, investing the sum of £5.50 each day for a child from birth until the age of 10 could result in a pension pot worth as much as £1 million by the age of 65.

Rob Gardner, campaigner for financial education and co-founder and former CEO of Redington, calculated the figure, saying that nothing else needs to be contributed after the age of ten.

The assumption is that the money will double every ten years (based on 7 per cent growth) and that the government will top the contributions up by 25 per cent.

Saving just £1 per day would result in a pot of £140,000 at age 55 and £275,000 at age 65.

If the £1 per day investment was continued to age 20, then stopped, £210,000 would be saved by age 55 and £420,000 by age 65.

Planning for the future

In whatever way that savings are made, putting aside a small sum of money instead of wasting it on unwanted gifts could turn into a huge advantage for a child in later life when a financial boost is needed most.

Cutting down on gifts today will not only lower environmental impact and reduce children’s expectations, it could be as valuable as a deposit on a first home one day.

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: