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“I COULD SEE AN INHERITANCE TAX PROBLEM ON THE HORIZION – AND DECIDED TO ACT”

Posted: 09/09/21

This case study is for illustrative purposes only and does not constitute advice.

Peter and his wife Jan are both in their early 70s, they have two children and four grandchildren. They retired 10 years ago and have been enjoying travelling, playing golf and spending time with their family ever since.

They live very comfortably off their final salary and state pension incomes and also have rental income, which is proving surplus to requirements.

In all, they estimate they have assets to the value of approximately £3million. They are aware that, if they take no action, then it is likely most of their estate will be passed on after the deduction of 40% inheritance tax.

Peter and Jan wanted to reduce the potential tax bill, but they needed help to understand the rules and were worried that, if they gave money away, they might struggle if they needed access to their money in later life.


Understanding the size of the problem.


We sat down with Peter and Jan, we got to know them, and we gained a detailed understanding of their financial, family and health situations. Like most clients, they had read some things about inheritance tax planning, and they had some ideas about what they could do to reduce the potential tax bill.

We discussed the broad range of options available to mitigate inheritance tax, which included making use of available gifting exemptions, regular gifts out of income, outright gifts to an individual or trust, investment in IHT exempt assets and taking out a life policy to cover the cost of the inheritance tax bill.

Peter and Jan were shocked to learn that their ISA portfolios, worth a combined £900,000, would be included in the value of their estate for inheritance tax purposes. They were concerned that, as quickly as they reduced their taxable estate, their excess income would build up and exacerbate the problem. They were also surprised to learn that their home, rental property, and lifetime savings meant they were too wealthy to benefit from the main residence nil rate band and so would lose a joint inheritance tax free limit of £350,000.

We determined that, with no action, the inheritance tax bill would be £940,000, reducing the £3million estate down to £2,060,000.


You can have your cake and eat it!


Most inheritance tax planning in the past was based on making outright gifts into a discretionary trust. The two issues our clients had were that they had given up access to the capital and they had to survive for seven years for that gift to be fully exempt from Inheritance Tax. For clients who are older, in poor health, or want to retain control and access to the capital and/or the income, this isn’t practical.

Peter and Jan have many years of investment experience and are quite comfortable with taking risk. They are also in the fortunate position of not needing access to capital or income now, but they don’t want to give that up for life. We recommended making an investment that qualifies for Business Property Relief (BPR); a longstanding relief from inheritance tax. We explained that, if BPR-qualifying investments are held for two years and at the time of death, they are zero-rated for inheritance tax.

BPR-qualifying portfolios invest in the shares of one or more unquoted or AIM-listed companies. They are higher risk investments than their existing investments, and the tax relief is designed to provide some compensation to them for taking additional risk.

If Peter & Jan survive for two years after making the investment and continue to hold the shares until they pass away, they would be expected to qualify for BPR. That means they should be able to leave them to any beneficiary free from inheritance tax when they die.

If Peter were to die within two years of making the investment and is survived by Jan, the shares can pass to Jan without the need to pay any inheritance tax. Jan would then continue the two-year clock and only need to survive until the two-year anniversary of Peter making the investment for the shares to be zero-rated for inheritance tax.

In other words, so long as one spouse survives two years, the estate should save on inheritance tax.

We also recommended to Peter & Jan, that rather than building up excess income in the bank, they should instead commence regular gifts from their income to their grandchildren’s Junior ISAs and their children’s pensions. As they will be regular payments from their income and have no impact on their lifestyle, these gifts will be exempt from inheritance tax, regardless of the total values.


The best time to make a plan is today.


We all lead busy lives and so many things get in the way of us taking the time to plan for the future.

At David James Wealth, we listen, we help you to create a financial plan with purpose and then we partner with you for the long term to make this a reality.

Have you been worried about the impact of inheritance tax on your estate? Talk everything over with our team. We’re ready to listen.

The Financial Conduct Authority do not regulate inheritance tax planning.

Transferring out of a final salary pension is unlikely to be in the best interests of most people.

Business Property Relief invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies. The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.


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