Financial advice in estate administration

ISAs have been very much
in the news recently, particularly the new lifetime ISA introduced in the March 2016 Budget. Another significant announcement was the extension of the special tax status of ISAs to the period from the date of death.

Draft legislation is included in the Finance Bill 2016, enabling new provisions for income tax and capital gains tax (CGT) to be brought in by secondary legislation. While we will await that detail later, it is worth reflecting on how this fits into administering estates.Financial issues often arise alongside tax ones, as with the ISA changes, and mean estates need some form of financial advice.

Investment portfolio

Estates that include a portfolio of investments mean choices for personal representatives (PRs) as to what to sell (for example,
to provide cash to meet tax, liabilities, and legacies) and
what can be transferred to beneficiaries. That can be
dealt with as a routine, quick consideration, particularly if beneficiaries simply want cash.
It can, however, help to offer some advice, in good time ahead of probate, so as not to slow down the administration. If there is an existing investment manager who has provided a probate valuation, they could be asked to produce an updated valuation showing market values against the probate figures.

CGT and income tax relief on ISAs from the date of death will add an extra element of potential advice where ISAs include stocks and shares or other stock market investments, such as unit trusts. If such investments within ISAs can be transferred to spouses, in specie, with full tax relief, that is an opportunity for PRs to consider with a surviving spouse. Many have built up substantial amounts in ISAs and preserving full CGT relief could avoid issues for estates about capital gains arising post death.

Appropriation issues

Effective use of appropriation of investments can add real value, particularly where there are both gains and losses post death. Where inheritance tax (IHT) is payable, potential claims to IHT loss relief by realising losses in the estate can be mixed with appropriating to beneficiaries, realising gains as 'bare trustees' for them.

Appropriation starts as a legal issue, satisfying all or part of an entitlement in a fair way at market value, after a revaluation. It is then important for tax, with investments being transferred across at probate value for CGT purposes, and any income being treated as the beneficiary's from that date.

It is also a financial issue. Which investments might the beneficiary wish to keep, for the medium term, and which are to be sold straight away in the most CGT-effective way? If it comes to selling all to raise cash, PRs can consider appropriating to beneficiaries so that their personal CGT exemptions can
be utilised, in addition to the
PRs' exemptions for the estate in the year of death and two more tax years.

For a surviving spouse considering their late spouse's ISA, it may simply be enough
to use cash to add to their ISA
the 'additional permitted subscription' equal to the probate value, but they may also wish to consider taking on the individual investments. This then becomes a financial issue on which they need advice, possibly general advice from a financial planner, as to their total resources and objectives with investment, attitude to risk, and so on, or perhaps more specific advice from an investment manager or stockbroker as to the choice of individual investments to take on.

I'm sure many have encountered those beneficiaries who have 'spent' their inheritance before it arrives, once they have any idea how much it will be, but nonetheless it is worth asking whether they need any help deciding what to do with their inheritance and how they might invest it to achieve their long-term objectives. Getting early advice from a financial planner, when the rough amount is first known, can be invaluable. That can help beneficiaries decide how much they can afford to give away, possibly by deed of variation, and how much to spend.

There are, of course, compliance issues in offering financial and tax advice that go beyond the scope of this article. Suffice to say, tread carefully and be clear who you are advising and what the limits are to your advice. It is, however, a road worth taking, with enormous potential to build better relationships with clients as well as financial advisers.

John Bunker is head of private client knowledge management at Thomas Eggar, part of the Irwin Mitchell group @Thomas Eggar www.thomaseggar.com