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Spring Cleaning your Finances

Budgets aren’t just for chancellors and finance directors. Working out the cost of your lifestyle is a valuable exercise. One which allows you to stress-test your personal balance sheet to ensure it is robust enough to support your way of life now and in the future.

Get smart with cash flow


Planning your cash flow to understand if you can maintain your desired standard of living is vital and will help greatly with your future investment decisions and estate planning.

Regular outgoings such as mortgage payments, insurance premiums, and school fees are easily identifiable, but it's important nevertheless to keep track of them.

Keep a watchful eye also on discretionary and variable expenditure. Items such as holidays, cars, boats, clothes and houses can have a huge impact on the state of your financial position.

Kicking the tyres of your investment vehicles


When making your plan, ask yourself the following questions:

  • What liquid assets do I have available?
  • If my liquid assets run out, which illiquid assets will need to be realised?
  • What level of cash flow is sustainable?
  • Can I afford to gift capital sums to loved ones without affecting my lifestyle?
  • Can I make regular gifts to my children out of my excess income?
  • Will there be enough income to maintain my family's living standard when I'm gone?
  • What is the likely value of my estate when I pass away?

Once you've carried out your stress-test you'll know whether your assets are more than enough to support your desired lifestyle, just sufficient or inadequate.

Armed with this knowledge you can then have a meaningful discussion with your wealth advisor to consider your strategy with regards to:

  • Investment portfolio advice
  • School fees planning
  • Protection (insurance and life assurance)
  • Estate planning
  • Philanthropy

Painless estate planning


While every family's circumstances are different, we all want the transfer of wealth to be as smooth, painless and efficient as possible. Planning well in advance is very much recommended.

Wealth can be more than simply financial assets. Ownership of a family businesses, for example, can complicate matters. It's important to balance the expectations and rights of all family members whether they work in the business or not.

Clear communication between generations – and a willingness to have potentially awkward conversations – is essential. Research shows that parents routinely overestimate the clarity and quality of their communication with their children on family wealth matters1.

A thorough planning process, supported by trusted advisors, ensures full understanding of the issues, removes sources of conflict, and retains family wealth through efficient transition.

Careful planning can also reduce exposure to inheritance tax (IHT).

Successful succession strategies to manage IHT


There are several effective strategies that can be used individually or in combination.

1. Asset reduction: gifting assets is one of the most effective ways to reduce the value of an estate and therefore its exposure to IHT. If the individual making the gift survives for seven years beyond the date on which the gift was made, it is not subject to IHT. If they don't then the funding of the IHT liability will need to be factored into the planning.

2. Asset freezing: with financial assets such as equities which should appreciate in value over time, you can ensure that future increases in value fall outside your estate. The simplest method is to make a loan. With a loan, any growth from investing the capital accrues to the borrower's estate and not the lender's.

3. Asset conversion: you can convert assets that don't qualify for IHT relief into assets that qualify for specific IHT reliefs, such as agricultural property or business property. Certain assets that qualify for IHT relief can be transferred to vehicles such as trusts without the usual lifetime charge of IHT (20 per cent)2.

While every family's circumstances are different, we all want the transfer of wealth to be as smooth, painless and efficient as possible. Planning well in advance is very much recommended.

Use protection


The impact of IHT on your estate can also be mitigated by taking out life assurance. This will provide your beneficiaries with the funds they need to meet some or all of the IHT liability. Hopefully removing the need to sell treasured possessions or the family home to meet the tax bill.

The most appropriate type of policy to help meet a predicted IHT liability is a guaranteed whole-of-life assurance. As the name suggests, this type of policy simply pays out when the holder passes away as long as the premiums on the contract have maintained to the date of death.

Review the size of your estate every three to five years. If it has changed substantially then your level of cover may need to be adjusted accordingly.

If you want to keep some control over the assets you are gifting, then a trust may be an effective vehicle to ensure that family assets are not misused. Trusts can be created either during your lifetime or through making the relevant provision in your will. However, there may be tax charges which need to be considered before making the decision to set up a trust.

Do you need help stress-testing your finances or developing a structured financial plan? HSBC Private Banking's wealth advisors can work with your Relationship Manager and Investment Counsellor to help.

HSBC Private Banking, Wealth preservation – why communication is key, October 2017
HSBC Private Banking, Inheritance Tax: how to prepare for future changes, July 2018

This material is issued by HSBC UK Bank plc which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the UK. It has been issued for your information purposes only.

Please note that HSBC does not provide tax or legal advice and clients should seek professional advice from their tax advisor. Any reference to tax is based on our knowledge of the current and proposed tax regime and is subject to change.

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