It’s a full-time job keeping up with changes and developments in any one area of financial planning, let alone across the whole sector.

    We tend to find that where people focus on one particular type of planning it can sometimes lead to more niche aspects being overlooked. In turn, this can have a wider knock-on impact for clients.

    We’ve considered what some of the ‘forgotten’ areas in planning might be, starting with estate planning.

    People are by now familiar with the complexities of the nil-rate band and the residence nil-rate band, as well as the use of trusts, insurance, gifts and business relief to mitigate tax.

    Yet there are things we've identified as either causing an unintended problem for clients, or as aspects that aren't always accounted for when it comes to inheritance tax (IHT) planning.

    Here are the three issues we believe are worth keeping front of mind:

    Guarantee periods and value protected lump sums

    Annuity guarantee periods and value protected lump sums can form part of the estate for IHT purposes.

    Unless the beneficiary of a guaranteed period under an annuity is the legal spouse, a value needs to be attributed to the estate.

    HM Revenue & Customs (HMRC) provides a calculator to work out the open market value of the outstanding income. This figure would then be included in the individual’s estate for IHT purposes.

    This is something to consider for those looking to reduce their IHT bill, who have defined benefit (DB) pensions/ annuity and no spouse. 

    For example, if an individual died five years into the guarantee period, and the annual income was £25,000 (increasing at 2.5 per cent a year), the HMRC calculator yields a figure to be included in their estate of £83,738.

    This means it's not simply a case of assets in the estate that need to be considered for IHT planning, but also the ‘notional value’ of a guaranteed income.

    Value protection is another popular form of annuity protection.

    This is more straightforward and represents the net payment to the estate. The ‘net’ aspect is due to whether the benefit is taxed or not (that is, whether the individual died before or after age 75).

    Yet it's also worth bearing in mind that potential 40 per cent of the ‘tax-free’ benefit paid back can be lost to IHT, which wouldn't have been the case within a pension. Again, this supposes there is no spouse to receive the value protected lump sum.

    The two-year rule on pension switches

    Pension death benefits and IHT continues to be a thorny issue. 

    The area we're keen to highlight here is that the two-year IHT rule on pension switches doesn't benefit from the spousal exemption. 

    But it’s worth noting that even if the spouse receives the value of the pension death benefits from the new scheme, the ‘transfer of value’ is not exempt.

    This is because the transfer of value is between two trust (pension) schemes.

    The good news with this though is the calculation of the transfer of value is usually a lot lower than the fund value or cash equivalent transfer value (CETV).

    Essentially, you are working out the net UFPLS value (based on the individual’s actual tax rate) and subtracting this from the fund value/CETV to find the transfer of value.

    You can also discount the original value to reflect the time of life expectancy – though this is unlikely to be by more than 5 -10 per cent based on the two-year time period.

    A simple example of this is if an individual had no taxable income and accepted a CETV of £170,000, the net UFPLS could be:

    £42,500 is tax-free (25 per cent of the fund)

    £127,500 is taxed as:

    • £37,500 at basic rate = £7,500
    • £90,000 at higher rate (no personal allowance) = £36,000

    Net value = £170,000 minus £43,500 tax = £126,500

    The transfer of value, before considering any discount factor, is £43,500 as this is the ‘loss to the estate’. In reality, this isn’t a loss to the estate as the calculation uses the CETV in both instances, instead of the actual DB death benefit structure.

    While the two-year rule, and the calculation to check the value is something to be aware, it's unlikely to be a significant figure relative to the CETV a client is securing for their estate by transferring.

    Impact to business relief

    The final key area to flag on IHT planning is that too much cash (or investments) within a business can impact eligibility for business relief.

    Successful companies can end up with quite large retained profits on deposit, particularly if the owner isn't drawing much of the profit as pay or reinvesting into the company.

    Whether this cash is invested on the company’s behalf or kept on deposit, there can be tax issues down the line for the owner(s).

    In terms of business relief and IHT planning, excess cash in the company can all foul of the ‘excepted assets’ rules. These seek to prevent personal assets held within a company to provide shelter from IHT.

    Many businesses legitimately keep reserves in place for several reasons, not least as a buffer against a future economic downturn. But HMRC takes the view this isn't a good enough reason for cash to be retained with the company.

    What it appears to look for is evidence of business planning for the funds. This could take the form of written plans for future cash use.

    The ultimate implication is that the value of the business assets held as cash may not qualify for business relief.

    This could introduce a potentially large amount of assets in the estate value and derail some of the planning otherwise made.

    The same is potentially true of general corporate investments.

    There's no general distinction between cash or investments used in this way. So if cash held by a business is deemed not to be for legitimate business use, investments will likely be classed the same way. 

    It would also probably be harder to prove legitimate business use for an investment.

    This obviously doesn’t mean a business shouldn't hold surplus cash or invest, but it does mean business owners can't necessarily be assumed as having 100 per cent exception to IHT.

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