Case study brief
Edward was typical of many of my clients: someone who had used Hargreaves Lansdown's Vantage service to choose their own investments on a non-advised basis for years but now wanted some help. Following his wife Suzanne's death, he had lost the interest needed to manage his portfolio.
Edward's income from National Grid and State Pensions was more than sufficient to meet his normal living expenses. His pension income is secure and increases to provide some inflationary protection. Edward rarely spent the capital he and his wife had saved hard for over the years, resulting in a net worth which was now around £750,000. Edward was in good health relative to his age of 77.
Edward was shortly to receive the assets from Suzanne's estate and this was the prompt for our first meeting. Around two thirds of their investments were in Suzanne's name and there was a loan (IOU) from the trust established on her death to be considered.
Initial objectives were to consider the best way to repay the IOU agreement, to review and take over the management of the investment portfolio and to maintain the value of the investment portfolio.
This is a real life case study. Names and some other details have been changed to protect confidentiality. 

I first met Edward at his home just outside of Bristol with his daughter Annette – I felt it was important to offer Edward the opportunity to have another family member involved and he was reassured by this. His son Malcolm joined us on subsequent meetings and I was only too pleased to provide them both duplicate copies of his financial plan. Edward was typical of many clients who had been running their own investments. Funds and shares had been accumulated over the years without any real strategy. Sometimes I think this is a little similar to the way people collect books: you see something you like and buy it, but rarely have a clear out or a sort through.

It was clear that Edward did not need to generate income from his portfolio, however, it wasn't surplus to his needs either. Like many of his age, he remembered the poverty of the post- war years and his biggest fear was running out of money: something that I demonstrated to him through modelling was actually highly improbable. However, Edward liked the financial security his portfolio provided him and no amount of factual data would persuade him otherwise. Perception is reality, however illogical it might be, and he did say he found the modelling exercise useful.
We discussed investment risk in detail and at first glance I felt he could probably afford to reduce the amount of risk he was taking and increase his cash balances. As a longstanding investor, Edward wasn't keen on this and preferred his money was working for him and particularly that it maintained its spending power compared to rising prices.

Edward is a reasonably experienced investor when it comes to fixed income and equity investments, having held these assets through funds and individual securities for tens of years. He understood that his assets could not work for him without accepting some investment risk. He had the capacity for investment risk for several reasons. Firstly, his income needs are more than sufficiently met from the existing secure sources of pension income. Secondly, he can generate additional income from his portfolio for his own needs if necessary in future without drawing on capital. Put another way, in the event of a market downturn, however cautious his investments are positioned, he had resources to provide income and or capital for expenditure requirements. 

We also discussed gifting and inheritance tax and Edward was not really hugely motivated about either of these, feeling his children were already nicely set up. But he did like the idea of setting something aside for his grandchildren with some small inheritance tax savings a nice by- product, so we discussed using some of the income currently being reinvested within the portfolio to be earmarked for this purpose. In this way he wouldn't be spending capital or dipping into his pension income.

The loan (IOU) agreement
The loan (IOU) agreement technically created a debt owed by Edward to the trust, this being arranged for the purposes of conveniently dealing with inheritance tax and possible future 'asset protection' issues. His children had sought legal advice on whether to eliminate the Nil Rate Band Discretionary Trust (NRBDT) in favour of enabling the estate to benefit from approximately two full nil rate bands in future (save a couple of small legacies from Suzanne's estate).

I explained there can be divided opinion on this matter, although often the elimination of the NRBDT is favourable where there could be issues surrounding the decision of the Special Commissioners for Tax in the Phizackerley case. This case disallowed a loan of property from Mrs Phizackerley's estate to her husband for IHT saving purposes because it was argued that the house was an asset of her husband and that insufficient evidence could demonstrate the contribution from Mrs Phizackerley. If this were the case for Edward, it would make sense to eliminate the NRBDT from his late wife's will, so the estate could benefit from two nil rate bands on his death. However it was the view of Edward's solicitor that this principle did not apply in his case and the NRBDT remained.

Edward's preferred decision was to retain the NRBDT and the trustees, Malcolm and Annette, to loan the estate assets to him to invest as required.
The loan decision was based upon keeping matters straightforward, convenient and to provide flexibility for trustees to 'call in' the loan at any future point should there be a need to potentially protect assets from issues such as from the Local Authority (LA) seeking retribution in the event the LA has to meet care costs in future. Edward's solicitor has advised the loan would not fall foul of the Phizackerley case.

The debt to the trust was £316,000. To demonstrate commerciality, and also mitigate any future inheritance tax, it seemed sensible for the loan agreement to charge interest, perhaps interest on a rolled up deferred basis and I referred Edward to his solicitor to discuss this particular matter with him. In practice Edward and his children did not anticipate needing to 'call in' the loan to the trust and in the event this did occur they anticipated the investment portfolio or part thereof would simply re-register to the trustees.

An emergency fund is essential to cover both unexpected and anticipated items of expenditure in the short term and I usually recommend a minimum of three months expenditure to be set aside as an accessible fund (approximately £5,000) together with sufficient to cover short term spending and reserving the equivalent shortfall in income to cover nursing home fees for four years, contingent upon this possible future eventuality.
This totalled £45,000 but given Edward's current cash balances currently standing at £56,000 we agreed to keep his reserve at this level.
The HL Vantage shares and unit trust investments (from Suzanne's estate) were transferred to Edward's name, together with the proceeds of a couple of insurance bonds making a total of around £350,000. There were no age allowance or other tax issues on the encashment of the insurance bonds.


A discretionary portfolio was established with the emphasis being to maintain the real capital value and produce some income from the Isa element of the portfolio. Asset allocation is shown here:
Fixed interest: 40-50%
Total/Absolute Return: 0-10%
Managed Equities: 50-60%

The majority of the switches to the new portfolio could be made without CGT implication and those which could not would be spread over the next few tax years using the annual CGT exemption. An auto-Isa facility was set up from outset for future Isa subscriptions.
The new portfolio removed the worry for Edward of having to manage his investments himself. He was able to consolidate and simplify his investment management and administration, make use of annual tax allowances, while also providing some tax efficient income naturally generated from the Isa portfolio to enable him to make gifts for his grandchildren's future.

At the same time, despite using a discretionary service, he retained the ability to view his investments online via his secure account whenever he wanted to. The discretionary service consists of investment funds which, based on the research and views of the HL investment research team, we believe are most likely to outperform over the longer term. The underlying investments are monitored and changes made when we feel it is the most appropriate time to do so and without the need to involve Edward in the decision making.

The income from Isa element would be around £5,000 a year which will be paid to existing Child Trust Fund and Junior Isa accounts for Edward's grandchildren. He expects to make these gifts regularly using the gifts from normal expenditure exemption. Finally I recommended Edward update his will and appoint Lasting Powers of Attorney. This would ensure that his affairs will be managed by someone who he trusts to act in his best interests should he be incapable of managing the affairs himself in the future.

What happened next
No good plan ends without action and the process started as soon as Edward and his family were happy with his plan. We also agreed how often we would review his plan, a factor of importance to him. Regular, typically annual, reviews are a key factor to ensure that he remains on track and that his plan remains relevant as his circumstances and tax and legal systems change over time. Naturally different assets tend to grow at different rates and unless his portfolio is regularly reviewed it will become less balanced in time.

A few weeks on and the investment transactions have now been made and the portfolio is in place. Edward feels he doesn't need to worry or "even think about" his portfolio now, putting his mind at ease. Malcolm and Annette are pleased to know that their late mother's estate has been finalised.
I have spoken to Edward a few times and he is on good form. It is pleasing to me that he is asking questions about his portfolio and markets, showing he is still engaged with his investments.