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Inheritance Tax Case Study: Mrs Taylor

Posted by Scott Millar, Financial Planner

In this case study we will look at:

● How Mrs Taylor wanted to mitigate a potential c£2.6million future Inheritance Tax (IHT) bill
● The four options we considered as solutions for her estate
● How the final recommendation saved £240,000 in IHT.

*Please note that our client’s name has been changed for confidentiality reasons.

Specifics

Mrs Taylor is a 79-year-old mother and grandmother from the South West of England, who is enjoying her hard-earned retirement. She lives a relatively modest lifestyle, with a few items left to tick off her bucket list. However, her main financial goal is to make sure her family's future is well taken care of.

Mrs Taylor lives in a beautiful home in London, valued at £3million, and has stocks and shares investments of circa £2million. The investments have performed well and are showing significant capital gains.

When we met Mrs Taylor, he was under the impression he had extensive Inheritance Tax (IHT) planning and wouldn't have to pay IHT on her main asset, her home. However, our initial research showed that the complicated trust arrangement he had established to remove the value of the main home from her estate would not work. On death, Mr Taylor's family would have an immediate IHT liability of £1.87m, which would increase to £2.6m if she lived to 100.

Social Norms

Mrs Taylor is a 79-year-old mother and grandmother from the South West of England, who is enjoying her hard-earned retirement. She lives a relatively modest lifestyle, with a few items left to tick off her bucket list. However, her main financial goal is to make sure her family's future is well taken care of.


Mrs Taylor lives in a beautiful home in London, valued at £3million, and has stocks and shares investments of circa £2million. The investments have performed well and are showing significant capital gains.

When we met Mrs Taylor, he was under the impression he had extensive Inheritance Tax (IHT) planning and wouldn't have to pay IHT on her main asset, her home. However, our initial research showed that the complicated trust arrangement he had established to remove the value of the main home from her estate would not work. On death, Mr Taylor's family would have an immediate IHT liability of £1.87m, which would increase to £2.6m if she lived to 100.

Problem - problem gap (perceived state v desired state)

Mrs Taylor and her children had three main goals: 

  • To make sure Mum would be OK and have enough money to live comfortably
  • To pass on as much money as possible to the family when Mrs Taylor eventually passed
  • To continue to live in her family home.

Mrs Taylor was also aware that her investments had performed well and that he would have to pay capital gains tax on any disposals. This knowledge had historically stopped her from selling assets and gifting money.

Empathy and Authority

First Wealth are Chartered Financial Planners and have helped many of our clients with intergenerational wealth planning. We understand the complex interrelationship between wanting to help your family now, whilst ensuring you have enough to live on for the rest of your life.


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Solution

The First Wealth team explored four broad options to mitigate Mrs Taylor’s IHT liability without compromising her quality of life in retirement.  

 

  1. Spending more money. This would reduce the value of the estate that IHT will be chargeable on. However, Mrs Taylor had few desirable expenses which would make much of an impact - such as a worldwide cruise. There was little need or scope to spend more

  2. To consider making gifts. In 2020-21, the gift would fall outside of the estate after seven years. Given that Mr Taylor was in her 70s, the decision was taken that this was not the best option

  3. Taking out a Whole of Life insurance policy where the eventual payout would cover the remaining IHT liability. However, due to Mrs Taylor’s age it was no longer possible to take out a new Whole of Life policy

  4. Investing some of Mrs Taylor’s estate in IHT efficient Investments. This was the option we went for.

Our detailed cashflow modelling showed that Mr Taylor could commit £600,000 into IHT efficient investments without lowering her standard of living.

We therefore recommended that Mrs Taylor sell £600,000 from her existing portfolio of investments.

 

This sale would create a capital gain of £220,000. The tax due on this sale was estimated at £44,000 (Mrs Taylor had already used her CGT allowance in the current tax year).

 

We recommend that the £600,000 was invested between two Business Property Relief (BPR) investments. Provided the shares are held for a minimum of two years, they are free from IHT upon death of the investor. 

 

The first £485,000 was invested in BPR investment and had a liquidity period of four weeks, meaning Mrs Taylor could still access the money if he urgently needed it. We also negotiated a lower fee due to our relationship with the service provider - saving £4,850. 

  

The balance of £115,000 was invested in a BPR investment which also qualified as an Enterprise Investment Scheme (EIS).

 

What future benefits gained

 

Provided Mrs Taylor survives two years, she will save £240,000 Inheritance Tax.

 

Investing £115,000 in the EIS allowed us to defer capital gains tax of £23,000 (of the total due of £44,000 on the sale of the investments). The Capital Gains Tax deferred will disappear if the asset is held until death.

 

In addition, the EIS investment qualified for 30% income tax relief of £34,500. This tax relief could be offset against income tax paid on her pension, and effectively paid the capital gains tax bill that was due on the sale of her investments and put her in a positive tax position.

 

  • Total tax saving of £297,500 (assuming Mrs Taylor survives for 2 years).
  • Cost of advice - £8,000 (£2,000 initial planning fee and 1% implementation fee on the investments £6,000)

Most importantly, Mrs Taylor now has peace of mind that her children will inherit a significantly enhanced portion of her estate.


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What did you avoid?

The planning has helped us avoid the flawed complex trust planning. This would have only been discovered on death, at which stage it would have been too late. With so many regular legislative changes, it’s essential to review any previous planning you have made, along with the provisions of your Will.

To find out how First Wealth can help with your Inheritance Tax planning and intergenerational wealth transfer, please contact us on 020 467 2700 or e-mail us at hello@firstwealth.co.uk.

This document is Marketing Material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested

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