The importance of having intergenerational objectives in mind throughout the financial planning journey (part one)

I can’t overstate how important intergenerational planning is for both clients and advisers.  It’s generally well known by advisers – especially those appreciating the importance of longevity of client relationships to the value of their business. The better the job you do for your client’s family (and the deeper your relationship and connection with them), the more likely they are to retain you as their adviser beyond the lifetime of your “primary client”.

Understandably, there is usually a strong focus on minimising IHT and maximising the transfer on death when it comes to intergenerational planning.  But the success of this planning is significantly enhanced by using successful tax efficiency strategies throughout all three parts of the wealth planning process. These are accumulation, decumulation and transfer.

It is obvious really – if you accumulate tax efficiently, your client will have more to draw on in retirement. If you can release the funds your client needs in retirement in the most tax efficient way, there will be more money left to transfer to the next generation.

And the happier the next generation are, the more likely they’ll want you to be their adviser.

So let’s look at these three stages in a little more detail. First, successful wealth accumulation. Simply put, the more you have, the more you have to pass on.

For many, a disciplined savings and investment strategy will be an important foundation to successful accumulation over time.  A more tax efficient accumulation strategy will result in a better outcome for the investor and a greater retained sum for that all-important decumulation through retirement.

Tax efficient accumulation which leads eventually to tax efficient intergenerational transfer can, in our opinion, be broken down into two parts:

  • Generally tax efficient accumulation
  • Specifically tax efficient accumulation

What do we mean by that?

A) Generally tax efficient accumulation:

  • The tax “no brainers” of pensions, ISAs, VCT and EIS.
  • Using the available income tax allowances and exemptions to accumulate money tax efficiently. This includes the personal allowance(s) of £12,570, the personal savings allowance (£1,000 for basic rate taxpayers/£500 for higher rate taxpayers), the 0% starting rate for savings income (£5,000), the dividend allowance (£2,000) and lower tax rates for dividends.  There is quite a lot of scope there, and while the tax tail shouldn’t wag the dog the owner should at least be aware that the dog has a tail (docking having been made substantially illegal) and that the tail can do a pretty good job for the dog – see what we did there?
  • Using the £12,300 CGT exemption to uprate the base value of the investment each year through appropriate sale and repurchase, while avoiding the anti-avoidance “bed and breakfast” provisions. Remember, the CGT exemption cannot be carried forward so “use it or lose it.”
  • Tax deferment using onshore or offshore bonds.  The life company will provide a ‘tax shelter’ especially for higher rate and additional rate tax paying investors.  This can be potentially effective if the investor can manage their taxable income so that the gains (top sliced, remember) can fall under the higher rate threshold in the tax year of encashment. This will mean an especially attractive “no charge” on encashment for an onshore bond and a reduced charge for offshore bonds.  For offshore bonds holding the bond and then assigning segments to the next generation when they have their own personal allowance, PSA and 0% starting rate available can be especially tax efficient, as bond gains are treated as ‘savings income’ for UK tax purposes.

B) Specifically, tax efficient accumulation:

As well as all of the ‘generic’ tax efficient accumulation strategies that will eventually serve the next generation, there are also some specific ‘next gen’ tax efficient intergenerational investment opportunities.

  • Junior ISA – up to £9,000pa.
  • Designated collectives for the next generation – if properly structured these can use the CGT exemption of the donor and also their available income tax allowances/exemptions if the donor was not the parent of the minor, unmarried done.
  • Pensions for children up to £3,600 gross (costing £2,880) can be saved each year to build a brilliantly tax effective ‘next gen’ fund.

As mentioned above, there is also the offshore bond that can be affected and held by the investor with a later, tax neutral, assignment of policy segments. The assignee (typically child or grandchild over 18) can then tax efficiently encash this using their own personal allowance, personal savings allowance and 0% starting band as appropriate.

All of the above opportunities exist and have existed for quite some time and should all be considered as part of the overall financial plan that, for all families, will culminate in a tax effective and beneficial intergenerational transfer.  

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