As people get older they are faced with entirely new questions when it comes to financial planning and wealth-management. Top of mind is probably securing a sufficient income in retirement to ensure that they can continue to live in comfort. After that comes succession planning – how to pass their wealth and assets on to the next generation in the most effective and tax-efficient way.
Put like this it sounds a perfectly straightforward proposition but, as Davy tax and financial planning strategist Deirdre Lyons notes, this is not necessarily the case. “We now have for the first time in this country a generation of people who have built up significant wealth in their own names,” she says. “These people are now in their 60s, 70s or 80s and they are looking to pass that wealth on to the next generation but it is not as simple as it seems.”
In some cases, the difficulty lies in fears about what will happen when the children inherit. “They are worried about the impact of wealth on their children. But there are also more personal issues. Thinking about these things makes people aware of their own mortality. It can be a difficult conversation to have. Because these are relatively new questions in Irish life, people tend to put them off.”
With the capital acquisitions tax rate having increased from 20 per cent to 33 per cent today, the tax question has become even more compelling.
Davy carries out regular surveys of clients and in the most recent one 68 per cent of respondents said transferring wealth to the next generation in a tax-efficient manner matters to them. Respondents are also asked if they wish to pass on their wealth while they are still alive or if they wish to do so on death, as well as other questions.
“If they have decided that they want to pass on their wealth in the form of a gift there are certain control structures they can put in place,” Lyons explains. “They can use a family partnership, for example. This is a legal structure which puts the ownership of the assets in the hands of the next generation but the parents retain the voting rights. The value of the assets transferred is held at today’s level for tax purposes. This prevents the kids from going off the rails as many parents fear.”
The other pressing issue for people in this bracket is securing their own income in retirement. Investec head of tax and financial planning Andrew Fahy points out that too is not as simple as it used to be. “This generation of people is used to getting a positive real return on deposits – a return that is ahead of inflation,” he points out. “And if they wanted to dip their toes in investment markets they could go into government bonds for a secure income. That’s not the case anymore.”
Record lows
Indeed, with some banks now actually charging customers for deposits and government bond yields at record lows, the scope for income-generation from those sources is limited.
“That presents a challenge for Irish people,” Fahy adds. “We don’t have as long a history of investing as other countries such as the UK. For example, in the UK the approach tends to be to buy your home, then build up a diverse investment portfolio, and then possibly buy an investment property. Here, it has been to buy your home, buy an investment property, and then buy another investment property. They bought an annuity for their retirement pension, and annuity rates are way down.”
This means people are going to have to invest in other asset classes such as equities. “People are going to have to invest and they are investing,” he notes. “But that leads to risks if they do it without advice. Some people are doing solo runs and moving into the broader investment universe without advice. This is hugely risky and people should not do it.”
When it comes to passing on the wealth, he points out it is possible for people to take out what is known as a Section 72 insurance policy which will pay the tax on an inheritance after the insured person dies. One of the key attractions is that the payout from the policy is not itself taxable.
Deirdre Lyons adds that there are reliefs available for certain types of assets such as businesses and farms and that the dwelling house exemption which allows for a tax-free gift of a residential property to a child should also be looked at.
Finally, both point to the annual gift exemption which allows an individual to give up to €3,000 a year to children or grandchildren. This would allow a couple to give up to €30,000 a year tax-free to a daughter, son-in-law, and their three children, for example. Over a number of years this would certainly reduce inheritance tax liability quite significantly.