Consumer Duty, and the Elephant in the room: Could the humble Loan Trust help?
The Consumer Duty Legislation, which has been in force for just over a year, establishes higher standards of consumer protection in financial services. It mandates that firms must act transparently, honestly, and avoid actions that could cause foreseeable harm— or to look at it another way, ‘foreseeable risk’ to the business.
In FG22/5 and PS22/9 the FCA stipulates:
“Whether harm is considered foreseeable would depend on whether a prudent firm acting reasonably would be able to predict or expect the ultimately harmful result of their action or omission in connection with the product or service”
Advising clients on mitigating Inheritance Tax (IHT) liabilities through exemptions, Business Relief (BR) qualifying investments, and lifetime gifting—whether Potentially Exempt Transfers (PETs) or Chargeable Lifetime Transfers (CLTs)—is undoubtedly prudent. But where, then, is the elephant in the room?
The elephant lies in the failure to acknowledge, discuss, and address ‘other assets’ within a client’s estate that are effectively growing at a 40% tax drag. Ignoring these assets is an omission that could lead to foreseeable harm. The absence of this discussion and an appropriate file note, especially when the recommendation includes ‘topping up’ an ISA, could exacerbate the issue. The real concern isn’t necessarily the final recommendation, but the omission of critical considerations.
Restructuring assets and employing a Loan Trust could be particularly beneficial for clients with substantial ISA portfolios. By selling down the ISA portfolio and loaning the proceeds to the Trustees of a Loan Trust, all subsequent growth would immediately fall outside the client’s estate, thus becoming exempt from IHT. This strategy could also help curb the growth of the client’s IHT-assessable estate, particularly when Residence Nil Rate Band (RNRB) concerns are at play. The loan remains an asset within the client’s IHT-assessable estate and repayable on demand. It can be recalled after seven years to fund another CLT, thereby recycling the Nil Rate Band (NRB).
When a CLT is recommended, the order of gifting is crucial to optimize tax planning, especially with a view toward the Periodic Charge due in ten years. A holistic approach to planning, before any Trust is settled, is essential for achieving better client outcomes.
Ignoring the elephant is not best practice. Acknowledging it could open up new opportunities to provide clients with more comprehensive and effective advice.
If you would like information on the WAY Inheritor Loan Trust and the planning opportunities it offers, please reach out to your Business Development Managers:
Mark Wintle, Business Development Manager (South) – mark.wintle@waygroup.co.uk
John Humphreys, Business Development Manager (North) – john.humphreys@waygroup.co.uk