Paying for Financial Advice: Eliminating a £200k Tax Bill

Financial Advice - Cashflow Cop Police Financial Independence

 

(no. 009)

Disclaimer

I don’t write a disclaimer for every post because it is in my “About” section and on the bottom of my “Home” page.  However, for this particular post, I think it is important that I remind anyone reading this about the importance of doing your own research.  Cashflow Cop (the website – I am not about to refer to myself in the third person just yet!), is about documenting my own family’s journey towards FI and the decision we make based on our personal circumstances.  Everything I write is my own opinion and nothing I write is financial advice.

Finally, I will be talking about Inheritance Tax which is a topic involving death. If you are not in a mood for such a topic, then please skip this post. 

 

Life Is Unfair…

What I am about to tell you is more personal than the numbers you read about on this blog.  I think it is important to provide you a brief insight as to part of the reason why I am so determined to reach FI and why we paid for financial advice in the first place.

I have four siblings.  A younger brother and sister, and an older brother and sister.  I can’t remember my older sister because I was far too young when she passed away.  My parents don’t speak about her because it upsets them so I know very little about her.  I have heard from my late grandparents that she was very smart and polite.  I fight the urge to ask my parents about her because I know it would hurt them to think about it.  Perhaps one day I will pluck up the courage to talk to them about her before it is too late.  Being a new father, I can only begin to imagine the grief my parents endured.  Then in 2016, my brother-in-law suddenly and unexpectedly passed away at a very young age, a few months before our wedding and almost exactly a year before our son was born.  In fact, I had lent him the movie The Hateful 8 the last time I met him before he died and we were going to talk about it the next time we meet.  He was going to be my new movie partner since Mrs. CC is not really into films.  I will now never know what he thought of that movie nor watch how my son would bond with his uncle.  

Watching my wife and my mother-in-law cope with this loss and not knowing how to support them apart from just being there makes me feel useless most of the time.  Even in my day job where I see some of the worst aspects of society, his passing was a stark reminder of how not only unfair life can be, but also how short our lives can become.  Mrs. CC and I had embarked on our journey towards FI even before this, but it has really reinforced the idea of the importance of freeing up more time and also trying to enjoy the present.  I find that I still struggle with the latter but it is something I am working hard on.   I have asked Mrs. CC if her brother’s death has made her more committed towards FI.  She tells me it has not and that she is just as committed as the day we first set on this path.  This is perhaps an indication to me that she was even more committed towards FI than I was.  There is no such thing as ‘getting over’ a loss of someone you love.  It is a matter of learning to live with the grief.  This is something I try to explain to families when I attend a sudden death at work when they ask me how they can ‘move on’.  Mrs. CC has her bad days where she is not able to contain her sadness.  For those days, all I can do is be there for her to hug and offer a shoulder to cry on.  I wish there was more I can do for her and my mother-in-law.

 

The Responsibility of an Inheritance

So why did I tell you about such a personal story above?  When I decided to write this blog, my main goal remains to be a place where our children can go back to in the future to see how we got to where we are and hopefully learn to be better people in the process.  Money is only a part of it.  My second goal was to show others how we are going about this and what is possible.  To those ends, I think it is important that I am honest and as transparent as possible.  The path towards financial independence is not one where the sun continually shines, the route lined with flowers and birds chirping in the background.  It is one where you are not immune to the realities of life.  

With my brother-in-law no longer with us and where he did not have a will, his estate automatically passed over to my mother-in-law through the rules of intestacy.  As a result, when my mother-in-law passes away, her estate would now generate an inheritance tax bill much larger than we originally envisaged.  We had a discussion as a family and made the decision to seek financial advice in order to reduce or eliminate some of the taxes which could affect us: Inheritance Tax, Capital Gains Tax and Income Tax.  For me, such conversations are always uncomfortable, especially given the circumstances.  However, we are lucky in the fact that we are all sensible people who understand the importance of financial planning regardless of how emotive the subject may be.  We also wanted to understand Trusts better and see whether it made sense to put some or all the properties into Trust.  Put simply, Trusts are considered as a separate legal entity (therefore does not form part of your estate) where you can transfer assets into and not be subject to inheritance tax if certain conditions are met.  This podcast here is helpful.  

Although this potential inheritance has the ability to provide us with a very comfortable safety net, we still aim to stick to our original plan and work as hard as possible over the next 7 years as if there is no inheritance at all.  We both think that it is our duty to not only protect any inheritance Mrs. CC receives, but also ensuring that it grows for future generations.  It is also our hope that our children will adopt the same attitude and protect anything we leave to them.  An inheritance should not be an excuse for us to take it easy and must not be an obstacle to achieving our own full financial potential.    

Mother-in-law has two properties (three bedroom houses) in the South East which is rented out and mortgage free.  She also has a third property (a four-bedroom house) in the South East which she lives in.  This property was gifted to Mrs. CC some years ago but as she lives there rent free, it is classed as a gift with reservation (also known as an imperfect gift) so is still liable for inheritance tax.  The 7-year survival rule does not apply because it is not a true gift.  So in effect, we were seeking advice on limiting our tax liabilities on these three properties which worked out to be over £200,000 in inheritance tax.  That is a lot of money to lose which could easily (and legally) be avoided with careful planning.  As I have said, these three properties do not form part of Our Numbers or Our FI Plan.  The fact that Mrs. CC has such an inheritance has only made me work even harder to prove to ourselves and our children that there is no substitute for hard work and dedication.  Some would say we are very fortunate.  Whilst we are grateful for the financial position we are in, I am not sure fortunate is the right word.  Mrs. CC and I would trade this potential inheritance in a heartbeat to have her brother back.

 

Finding a Financial Advisor

The thing about financial advisors when you do a quick Google search is that they have a bad reputation.  How do you really know if they are working in your best interest?  This is part of the reason why we spoke to more than one financial advisor.  We were signposted to these advisors through recommendations which we followed up with our own research to check their reputation and credentials.  Before the meetings, I also read up on capital gains tax, inheritance tax and Trusts so that I can ask probing questions and also to help judge the advice that I would be given.

 

Financial Advisor One

Qualification: FCA (Fellow Chartered Accountant) specialising in inheritance tax

Advice: one property into Trust.  Mother-in-law to start paying full market rent for the property she gifted to Mrs CC.  As the 50% of that property already belong to Mrs. CC after her late father passed away, mother-in-law would only need to pay 50% of market rent.

Advice Cost: £380 + VAT (£456 Total) – fee waived

We spoke to this advisor and explained our position.  The fee was for approximately two hours of work consisting of a 45 minutes meeting and 75 minutes to write up the advice.  Yeah, I know.  75 minutes is a long time to write up a few paragraphs to confirm the advice given during the meeting.  However, I think it is about right assuming he needs to double check all the advice he provides (I’m being kind here).  By executing the advice above, we would eliminate 100% of the inheritance tax bill.  Getting the Trust sorted would incur a separate fee which would be in the thousands.  In the end, the advisor waived the advice fee as we received a poor level of service (slow to prepare the report).

 

Financial Advisor Two

Qualification: CTA (Fellow Chartered Tax Advisor) specialising in inheritance tax

Advice: same as Advisor One

Advice Cost: £395 + VAT (£474 Total)

Execution Cost: £6500 + VAT (£7,800 Total)

As with Advisor One, we explained our position.  The advisor came to our home to meet us.  The meeting lasted about an hour.  He drove a very nice and new white Audi Q7 with a personalised number plate.  The execution cost listed above probably helps to explain how he could afford it!  I’m being unfair here.  In the grand scheme of things, £7,800 to create the Trust which is an area requiring very specialist knowledge in order to save hundreds of thousands in inheritance tax seems like good value.  In fact, in the final letter of recommendation, he even works out how much this fee represents as a percentage of our overall tax liabilities if we went ahead as planned.  Seemed like a no-brainer.  However, being the sort of person I am, I wanted to get some further advice.   I had to weigh up the cost of further advice against the likelihood of wasting that money only to receive exactly the same advice and similar cost of execution.  In the end, I decided it was worth it.  £7,800 is still a lot of money no matter how much money it could save us.  In fact, it got to a stage where mother-in-law got tired of it all because it was all too technical and expensive.  She even suggested we abandon the whole idea because we could “afford” the tax bill by selling one of the houses when the time comes.   I don’t think she really meant it.  It’s more that she was upset because none of this would have been an issue if my brother-in-law was still around.

 

Financial Advisor Three

Qualification: Chartered Financial Planner

Advice: one rental property gifted to Mrs. CC.  As this property would be a gift without reservation since mother-in-law won’t be living there, it will be exempt from inheritance tax if her mother survives 7 years (the 7-year survival rule – see also the lesser known 14-year rule).  Mother-in-law to start paying full market rent for the property she gifted to Mrs CC.  As 50% of that property already belonged to Mrs. CC after her late father passed away, mother-in-law would only need to pay 50% of market rent.

Advice Cost: FREE

Execution Cost: advised we can sort it all out ourselves for relatively little money.

This was a telephone consultation lasting about 30 minutes which was free of charge.  He questioned why we needed a Trust in the first place as they are costly to set up and also incur extra costs to run.  In the end, his advice was the same as Advisor One and Two except for using a Trust.  

 

Financial Advisor Four

Qualification: Chartered Financial Planner

Advice: same as Financial Advisor Three

Advice Cost: FREE

Execution Cost: advised we can sort it all out ourselves for relatively little money.

As a Police Officer, I have access to PMAS (Police Mutual) Financial Advisors because I have some of their products.  I have spoken about some of the products I have from them in Our FI Plan.  This was a 30-minute telephone conversation where his advice was the same as Financial Advisor Three.

 

Financial Advisor Five

Qualification: Chartered and Certified Financial Planner specialising in inheritance tax

Advice: unknown

Advice Cost: £1,295 + VAT (£1,554 Total)

Due to the cost quoted just for the planning stage, we decided not to go ahead with the consultation.  

 

Our Decision

In the end, we opted to go with the advice provided by Financial Advisors Three and Four.  It would eliminate 100% of our inheritance tax liabilities whilst also avoiding the high execution and running costs involved with a Trust (income taxed at 45% Trust tax rate, preparation of annual Trust accounts etc).  From tax year 2018/19 onwards, Mrs. CC’s income will increase due to her mum paying rent and the income from another rental property.  To mitigate the increase in the income tax she will pay, we are planning ahead by paying more into her pension accounts.  

We had to pay for two valuation reports to be completed by Chartered Surveyors.  One at the property her mum lives in to determine the market rent she needs to pay Mrs. CC.  The other to determine the market sale value of the rental property in order to complete the transfer of equity into Mrs. CC’s name.  It is important to instruct Chartered Surveyors rather than just getting free valuations from your local estate agent because the values a Chartered Surveyor provides would be more reliable and is accepted by the tax authorities (HMRC) if we were to get audited, whereas a local estate agent valuation is not.  

In terms of capital gains tax, the rental property made a gain of £90k in less than two years.  My mother-in-law did very well there!  She’s an impressive lady who accumulated her wealth through being extremely frugal (more so than Mrs. CC and I) and working double shifts when she was a nurse.  Fortunately, as she lived in the rental property for a short period of time, we are able to make use of Private Residence Relief and Lettings Relief.  As a result, our accountant has completed the calculations and confirm that there is no capital gains tax to pay.

 

Cost of All This Planning

Bearing in mind all this planning was to eliminate an inheritance tax bill of over £200,000, the total cost of £1,764 represented a mere 0.89% of the tax we would have potentially paid.  It is important to note that this is based on current IHT legislation and could be subject to change.  As a result, it would be important for us to conduct a review every so often to ensure we are not caught out by new legislation.  

Service

Financial Advisor Two

Chartered Surveyor (x2 Reports)

Accountant (CGT Calculation)

Solicitor (Transfer of Equity x 1)

TOTAL

Cost as % of IHT

Cost

£474

£700

£250

£340

£1,764

0.89%

Final Remarks

I hope you found this write-up useful.  Google and online forums are a wealth of information.  However, there are certain times when there is a need for professional advice and where it is not worth saving a bit of money at the risk of costing you a lot more in the future.   Here are some of the lessons I learnt from this experience:

  1. Do your own research to check the credentials of the advisors and also the advice they provide.
  2. Come armed with a list of questions which need to be answered by the end of the meeting.
  3. Don’t underestimate the value of professional advice.
  4. Paying some money for financial advice to save a lot of money is a wise investment.
  5. Sometimes free advice is the best advice.
  6. Always seeks a second, third or even fourth opinion.  
  7. IHT planning is not a one-off process.  It needs to be reviewed based on changes to your estate and/or legislation.  

In terms of specific tax lessons:

  1. Trusts are expensive to execute and run.
  2. Trusts are not always suitable.  Understand the reasons why you need a Trust as opposed to more straightforward arrangements.
  3. Understand the meaning of an imperfect gift (gift with reservation).
  4. Know the 7-year rule and also the existence of the 14-year rule.
  5. Understand how Private Residence Relief and Lettings Relief can save you money on Capital Gains Tax.
  6. When it comes to inheritance tax planning, I found that there was much cross-over between legal and financial advice.  For example, you first pay the fee to the financial advisor to design the plan and then pay a much larger fee (if it is a Trust) to a solicitor to execute.  

So what experience have you had with getting professional financial advice?

 

Further Reading

Live It, Don’t Preach It: Getting Your Partner to Embrace FI

Living Optimistically Through FI

Our Why FI