Tony Wickenden: Intergenerational strategies should start long before estate planning

There are two great reasons to embed an intergenerational approach into financial planning strategies.

The first is that it will usually help your clients achieve an objective important to them – to protect the wealth that will pass down to the next generation.

The second is that it will enhance the longevity and value of your business through greater certainty of business flow and fund retention. Potential buyers love predictable, stable revenue flows.

Of course, not every client will want to engage other family members in a discussion of their finances. And it’s not only the older clients (those mostly with the wealth) who might have this resistance to cross generational communication.

It is supercharged by the accumulation and decumulation phases of a financial journey

Younger clients can feel awkward discussing the likes of inheritance tax (IHT) with their parents. I mean, it seems a little “self-serving”, right?

But with suitable coaching and an explanation of the benefits, this barrier can often be overcome.

Much intergenerational planning, understandably, focuses on estate planning but outcomes will be optimised if an intergenerational approach is deployed throughout all three phases of the financial planning lifecycle:

• Accumulation
• Decumulation
• Preservation and transfer

Throughout all of this, paying attention to embedding as much tax efficiency as possible will contribute to the best outcomes. It’s obvious really.

In the accumulation phase, look to maximise front-end tax relief when it’s available and minimise tax on income and capital gains on invested funds.

In the decumulation phase, look to minimise tax on what you draw (by using exemptions, allowances and tax freedoms) and ensure undrawn funds remain in the most tax efficient environment.

If there is scope and desire to invest specifically for the next generation, then it’s definitely worth considering

When funds are transferred, ensure they can be done so free of IHT (or with as little as possible). And let’s not forget how effective life assurance plans in trust can be in creating or enhancing an inheritance.

Let’s look at each of those phases in a little more detail.

Accumulation first. Thinking intergenerationally aligns with tax best practice for the main client in relation to their own investments.

Taking full advantage of the tax no-brainers such as Isas, pensions and VCTs/EISs will all help maximise returns. And the greater the accumulated (un-tax diminished) funds, the better it is for the next generation too.

As well as investing in a “tax smart” way, if there is scope and desire to invest specifically for the next generation, then it’s definitely worth considering.

The £9,000 per annum that can fund a Junior Isa set up by parents but contributed to by anyone is a great option.

The alternative of collectives held in trust has the baggage of the Trust Registration Service and the reducing dividend allowance and capital gains tax annual exemption to weigh against it, despite the extra level of control over access it can deliver.

Of course, giving thought to up to £2,880 per annum being contributed into a child’s pension, topped up to £3,600 by HM Revenue & Customs, is a very worthwhile consideration for those taking the long view. The power of compounding remains as compelling as it always did.

A tax smart decumulation will then retain more of the tax smart accumulated funds, so that makes great sense, right?

When it comes to the transfer of funds to the next generation (often via a surviving spouse or partner), then minimising IHT is an obvious thing to strive for.

Up to £2,880 per annum being contributed into a child’s pension, topped up to £3,600 by HMRC, is very worthwhile

Lifetime transfers are always worth considering so as to reduce the taxable estate on death and it’s helpful that where cash or investments are available to plan with, access for the donor can be facilitated through trust/financial products combinations.

There’s also the IHT freedoms given by the protection of pension funds and investments that qualify for business relief.

Added to this should be the use of appropriate protection in trust to tax efficiently create or boost the inheritance and/or to provide for the payment of IHT.

So, my point is successful intergenerational planning is contributed to by appropriate IHT planning, but it is supercharged by what precedes that through the accumulation and decumulation phases of a person’s financial journey.

Tony Wickenden is managing director of Technical Connection