Richard and Alison did not see the point of having a Lifetime Cashflow Forecast – they knew that they had more money than they were ever likely to spend. But as soon as we started talking about the Inheritance Tax (IHT) they were likely to pay and some of the options available to mitigate this, their interest was piqued.
This is their Planning story:
Jonathan, their eldest son was living in a small rented apartment in New York with his wife and 2 children. He ran his own printing business and had in the past “borrowed” money from Mum and Dad. They felt his financial situation was “chaotic” and his ability to manage money was non-existent.
Mark their youngest had recently married and was living in London, working long hours as a hospital doctor. He was living in a house owned by Richard and Alison and paying a nominal rent. He and his wife wanted to spend more time doing medical volunteer work in Africa. He had never requested money from his parents and they wondered how he managed in London on so little income.
After extensive modelling of various “what if” scenarios to take account of future accommodation, holidays and potential nursing care costs etc, we were able to show Richard and Alison how much money they would need to keep to maintain their desired lifestyle until they were 100. Once we had determined this, we could discuss what they could do with the remainder of the money.
Jonathan and Mark were equal beneficiaries of their parents’ wills, but as Richard and Alison are only in their early sixties, they were likely to have a very long wait until they could collect their inheritance – possibly until they were also in their sixties.
Richard and Alison felt conflicted – they didn’t want to give their sons too much money immediately as they felt this would spoil their work ethic and send a wrong message (of entitlement) to their grandchildren. However, they thought it would be poor planning to leave a sizeable amount of their wealth to the taxman rather than their family, when this could be avoided.
We therefore suggested a solution which we felt accommodated the main concerns of Richard and Alison, but also allowed them to help their sons financially and pay as little tax as possible.
We suggested that outright gifts were made to Jonathan and Mark as soon as possible, so that there was a strong likelihood of Richard and Alison living for 7 years after the gift, thus ensuring it will be excluded from their final estate value. The amounts that can be gifted in this way are unlimited and in this case allowed Jonathan to start buying a larger property for his growing family and Mark and his wife to take a 2 year career break to pursue their volunteer work.
We then looked at how we might be able to shelter their remaining money from IHT using simple arrangements that Richard and Alison could understand and maintain control of.
Firstly we devised a sustained strategy of making ongoing gifts to Jonathan and Mark (and the grandchildren) using their annual gift allowances and making gifts out of normal income that they didn’t need themselves.
Then we looked at making a further gift into Trust for the Grandchildren. Richard and Alison were delighted to learn that as Trustees, they had full control over how and when the money was distributed as well as how the money was invested.
Finally, we found an IHT protection scheme which was perfect for the low risk and return requirements Richard and Alison had. We agreed that there was no point taking too much investment risk when they already had too much money. This arrangement was able to put money outside their estate after 2 years using Business Property Relief.
Even after putting these tax planning strategies in place, Richard and Alison still had a sizeable IHT liability and we agreed to provide a temporary solution for this. We achieved this by putting in place a joint life, second death, life insurance policy for the remaining liability. This was written in Trust so that if it paid out, the proceeds will be paid immediately to the named beneficiaries (outside their estate) and the IHT liability could be paid quickly and the estate settled without delay.
Richard and Alison have not completely mitigated their inheritance tax liability, but we have helped them to mitigate this significantly. Further planning will be considered over the next few years and considered in line with their family circumstances. Not only that, but our advice has brought the family closer together as the complex planning required honest and open discussions between them all and the children are greatly appreciative of the help and generosity of their parents.
With all the worry taken away by professionals, all Richard and Alison have to worry about now is which golf course they are going to play next and planning their next holiday abroad.
Tax and Estate Planning Services are not regulated by the Financial Conduct Authority. This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 23.03.2017. You are recommended to seek competent professional advice before taking any action.