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Anand, a 25-year-old asset manager, and his family had no clue what do when his wealthy father died leaving them to deal with his estate.
“I’ve no idea to be honest [how we managed it], which is the problem. The system is so complicated,” says Anand, whose name has been changed at his request.
The sudden death of the London-based south Asian family’s patriarch a few years ago brought with it difficult conversations around estate planning, his sizeable property portfolio and a potential inheritance tax bill.
Anand’s father, who was among 40,000 Asians expelled from Uganda in the 1970s, set up a chain of post offices before selling up at the turn of the millennium and investing in real estate. Anand says he was “a very smart, very sharp” self-starter.
When he died he left several rental properties to his wife so there was no IHT to pay. But like a generation of south Asians who often relied on bricks and mortar to preserve and grow wealth, he focused on a single asset class, missed the benefits of diversification and failed to make the most of tax-efficient investment vehicles.
“The first generation that come to the UK might not have the same awareness of [IHT as people born here],” says Lucy Woodward, a partner at accountancy firm Saffery Champness.
Many immigrant-origin south Asian families date their arrival in the UK to the 1950s, 1960s and 1970s. The more entrepreneurial householders built up wealth, often in small businesses, before diversifying into property. Now this focus on real estate combined with a lack of familiarity with tax rules could be a challenge.
The median property wealth of British Pakistani and British Indian households in the UK is greater than the white population, according to a report last year from the think-tank Institute for Fiscal Studies. For Bangladeshi households the figure was lower but these families still hold a greater proportion of their wealth in property than pensions.
Inheritance tax receipts have soared to £7.1bn in the year to April, up £1bn on the previous year, as more middle-income families have been brought into the net. A freeze on IHT thresholds has kept the individual tax-free allowance at £325,000, while rising prices have driven the average UK home price to £285,000, and in London to £523,325.
Without planning, a property portfolio such as Anand’s father’s can easily build into a sizeable tax bill.
“Plan as early as possible, thinking about what you need,” says Marco Malagoni, head of wealth planning at Waverton, an investment management company. “The best way to mitigate inheritance tax is to make use of the seven year [rule], to give assets away and live for seven years.”
Anand and his family turned to 15 different accountants and wealth managers following his father’s death to figure out a rational way forward. His mother opted for Malagoni’s route and gifted several of the properties to her children.
This enabled the family to head off a future IHT liability for a smallish CGT bill as it only applied to appreciation from the bequest date. But Woodward argues this may not be appropriate for everyone, as some clients prefer to use a trust to retain control and transfer wealth over a longer period of time.
Woodward adds: “When the entrepreneur is still alive, they would probably want to be a trustee, because they want control [and] visibility, but they do have to give up the benefit [of the assets].”
South Asian clients nearing retirement can still diversify their portfolios, according to Taka Mbedzi, an Edinburgh-based associate at St James’s Place Wealth Management. He says that for some of his clients this has meant using pensions as a way to reduce IHT liabilities and also divesting low-yielding properties.
Mbedzi says one wealthy Pakistani client’s self-invested personal pension contained a rental property yielding only 2 per cent. A difficult conversation ensued, but “he arranged for the property to be sold, and then we invested the money into an investment that was aligned with his values”.
He adds that some clients feel more comfortable with ideas once they have been discussed with an accountant with whom they have built a relationship over time as businesspeople.
However, Malagoni says countless clients’ parents still pass away without a second thought on what comes next, costing their heirs several million pounds.
Anand, who is already earning a six-figure salary, is likely to retire with a significant pot of wealth, says that unlike his parents he’ll focus on a broader mix of investments. “I’ve thought long and hard about property . . . but I don’t see how the benefit previous generations had is going to be replicated.”
Instead he is maximising his annual Isa allowance, while investing in the stock market. Anand says he’s in a fortunate financial position and his own professional background enables him to carry out more in-depth research into companies and investments.
But he is still avoiding certain questions about his own future. “I don’t necessarily think about [tax planning]. I’m sure one day I’ll have to.”
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