How we identify and support clients in vulnerable circumstances

Our ‘insincere’ apologies for returning to a subject, that is very close to our hearts at FB Wealth!

However, it has been brought to our attention that how the legal profession takes instruction and looks after clients with vulnerabilities or those who might find themselves in vulnerable circumstances, is increasingly under the regulatory microscope.

The Legal Services Board, who as the Legal Services Act appointed oversight regulator provides a strong steer to the SRA, has reiterated in its 23/24 business plan that ‘Consumer Vulnerability’ is one of 3 core work streams. This follows on from their superb research into consumer vulnerability, undertaken in 2022 which was designed to explore:

  • What people are vulnerable to when they use legal services, and the barriers or unnecessary frictions they experience.
  • What good inclusive service looks like for people in vulnerable circumstances and the balance regulation strikes between safeguarding an enabling them to use legal services.

Your own direct regulator, the SRA, then issued its own follow up guidance on taking instruction from vulnerable clients, or indeed third parties acting for them last July. As with ‘ongoing competence’ the pressure from the LSB, will undoubtedly bring renewed SRA focus in 2023 and beyond.

Our own regulator, the FCA, has also been taking how the financial planning community assists and supports clients in vulnerable circumstances extremely seriously, and for a longer period of time. This year a new FCA initiative, Consumer Duty, has this aspect of client care at its core. As we have highlighted to you previously, FB Wealth recognised how important this issue was at a very early stage and have made dealing with vulnerable clients a genuine strength and a specialism. We were very early supporters of the ‘Financial Vulnerability Taskforce’ to drive good understanding, behaviours and best practice in respect of consumer vulnerability.

That initiative is now part of the Consumer Duty Alliance, and we passionately believe that FB Wealth can share and support adoption of best practice in the arena of client vulnerability. We are in an excellent position to assist our law firm partners in developing your own polices and systems, and there are insightful resources on both the FVT and CDA websites we have highlighted.

We do hope this is of interest and we would relish a discussion in the near future……

A Reminder on Business Relief and how it might benefit your estate planning clients

As we have discussed in this forum more than once, the freezing or reduction of tax allowances and exemptions in the Autumn Statement mean that the estates of many more people could become liable to pay inheritance tax.

As you are well aware IHT is charged at 40% on the value of an estate over the current nil rate band – for an individual, currently, this is £325,000 plus the £175,000 residential nil rate band if applicable.

However, the IHT nil rate band has been set at £325,000 per individual since way back in 2009, and £650,000 for a married couple. When he was Chancellor of the Exchequer, Rishi Sunak extended the freeze until 2026, and his new Chancellor Jeremy Hunt has further extended this until April 2028. It was undoubtedly originally intended to impact the wealthier in society, but house prices alone could see families who never thought Inheritance Tax was something they’d have to worry about, dragged into its trap.

The residential nil rate band of £175,000 can extend the IHT nil rate band to £500,000, or £1,000,000 for a married couple but this has also been frozen until April 2028.  This can have a huge impact on families at risk of incurring an inheritance tax liability. Indeed, presently, according to the estate agents Savills, one in 42 homes in the UK are now valued at £1 million or above.

Because of the new taxation policies, laid out and extended last autumn and the worrying and currently irreversible impact, we felt it would be pertinent to remind ourselves of a way to help mitigate IHT payments by utilising ‘Business Relief’.

This relief was originally established to allow family firms to pass on their business through the generations without incurring large tax bills. However, it was extended to include any unquoted shares in a trading company, (those listed on the Alternative Investment Market,) which allows it to be used in estate planning.

Investments into a business relief-qualifying company becomes zero-rated for inheritance tax after two years. If held until death, they can be passed on free from a 40% inheritance tax charge. This time frame is, of course, in contrast to the inheritance tax exemption for gifts, which take seven years to pass out of the estate. This can make it a valuable tool to consider for elderly client who have not done as much estate planning as they might have wished, or indeed, for those who are in ill health.

Another benefit of business relief is that the money, although out of the estate after two years, remains in the control of the investor. This waylays what is a significant concern for many people, providing peace of mind, especially with the current generationally high rates of inflation and cost of living crisis and as the government indecisively dithers around the cap to long term care costs, and how to pay for it.

Business relief also fulfils its original function, enabling owners of a business (or those who hold a stake in one) to pass on their shares in the business free from inheritance tax – as long as the business activities meet the qualifying criteria for relief. This also applies if they sell some or all of the business – as long as within three years they invest some or all of the proceeds in another business relief-qualifying business.

It can also be useful tool for people who have built up significant ISA investments over their lifetime. While free of income and capital gains tax, ISAs fall within a person’s estate for inheritance tax purposes. A fact that many forget, thinking of ISAs as ‘tax-free’. Transferring some or all of an existing ISA into one that’s invested in business relief-qualifying shares enables the investor to retain ISA tax benefits, as well as control of their money. Once they have held the new ISA for two years, it should be zero-rated for inheritance tax.

Therefore, for your existing of new clients potentially facing an uncomfortable inheritance tax bill, business relief could be an option, bearing in mind the risks involved.

If you’d like to know whether business relief is suitable for clients with whom you are discussing estate planning with, please contact us at FB Wealth, as we would be delighted to discuss the may investment vehicles, attracting valuable business relief, that we have researched and are confident to recommend.

As with most investments, your clients’ capital is at risk and the value of a business relief-qualifying investment, and any income from it can fall as well as rise. Investors may not get back the full amount they invest. Business relief investments are typically made into companies which can be smaller or early-stage businesses. Hence the investments can be more volatile than, for example, companies listed on the main market of the London Stock Exchange. They may also be harder to sell. For these reasons, we would consider them high risk investments although the 40% IHT relief can serve to mitigate some of the risk.

Also, the tax treatment depends on individual circumstances and that the companies invested in maintain their business relief-qualifying status. Tax rules could change in the future.

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