Inheritance Tax Planning
Case Study
Background
Dr L and his wife have an estate worth £2.4million. They are very concerned about the amount of inheritance tax their two children may have to pay on their deaths.
Their will transfers all assets to the surviving spouse then children on second death.
The maximum Residence Nil Rate Band (RNRB) the L’s have available in tax year 2019/20 should they both die is £150,000 each. As the L’s estate is worth more than £2 million the RNRB available from the L’s estate is reduced by £1 for each £2 over the taper threshold (£2 million) to nil, therefore in this scenario the L’s would only qualify for the standard nil rate band of £325,000 each.Unless the L’s do some serious estate planning beforehand, their estate may be liable for an Inheritance Tax (IHT) bill of around £700,000 (£2.4million – £650,000 X 40%) on second death.
The Solution
Vance Financial Management set up two bonds for £325,000 in each name (equal to the max. nil rate band) with the objective of saving IHT, but without losing access to either their investment capital or the ‘income’ generated from the investment. The bonds were then transferred into two separate trusts making sure that:
- All growth in each investment is outside the L’s estate from day one
- The original capital invested by the L’s will be outside their estate seven years later
- The trusts/bonds can carry on for the benefit of their children on the deaths of the L’s
After seven years the L’s will have potentially saved £260,000 in IHT, as the original capital investment of £650,000 will be outside their estate for IHT purposes, at which point another investment may be set-up in order to further reduce their IHT liability.
What access do the L’s have to their funds?
Each year the L’s will have the opportunity to receive a proportion of their capital plus any growth in the form of annual policy maturities. If no income is required then maturities may be deferred to a future date of the L’s choosing.
In addition, the L’s can instruct the trustees to reassign maturities to either of their two children should they wish to do so.
We say
The sooner an estate planning structure is implemented then the sooner the seven year clock can start ticking. The RNRB is an additional factor to take into account when considering estate planning. Despite the Treasury introducing this additional allowance, the effect of freezing the standard nil rate band (£325,000) means that it still expects IHT receipts to increase over the coming years. Indeed, the number of estates making a contribution to IHT will be higher at the end of the decade than in any year since its introduction.
Tax planning and professional advice is vital to ensure that estates and wills are structured in the most tax-efficient way and that clients understand the amount of nil rate band that will be available in their specific circumstances.
Past performance is not a guide for the future. The value of units can fall as well as rise.
Currency fluctuations can also affect performance. You may not get back the full amount of your investment.
Our Services
Investment Advice
Ensuring adequate money is available for immediate daily needs as well as a reserve being set in place are just a couple of fundamental principles that are prerequisites to investing any sum of money.Investment.
Long Term Care Investment Advice
Arranging care for yourself or a member of your family can be a complicated process as well as being very emotional. There’s a lot to consider, and the process can feel overwhelming if you don’t have the right assistance to find the best possible care for you or your loved one.
Pension Planning
Vance Financial Management offer an extensive range of advice with pension planning depending on when you start your plan.
Retirement Planning
At Retirement, the advice needed is essential as the options available are wide and varied. Many of which are irreversible once selected, such as signing up to an annuity
Personal Life Insurance
Life Insurance provides you financial peace of mind insuring you and/or your family are protected in a range of circumstances including ill health, critical illness and death.
Critical Illness Cover
Could you and your family cope financially if you were not become critically ill and could not work? It’s not a nice question to consider, but it’s an important consideration. If you think you and your loved ones would struggle to pay the mortgage or meet the cost of other household bills, you should consider critical illness insurance.
Business Insurance
It’s important for businesses to insure their company’s property, equipment and fixed assets. However, it is far too common for businesses to overlook the people who drive the business. Many businesses fail to recognise the potential impact the death of a key employee, shareholder, or partner could have on the financial security of the business, not to mention on their surviving family.
Inheritance Tax
The current allowance whereby no inheritance tax is charged is on the first £325,000 (per person) of someone’s estate – which is the value of their total assets they leave behind when they die.
There are a number of ways in which you can avoid a high inheritance tax…
Trusts
Do you need assistance managing your money so it can be used to help someone after you die or to contribute towards your care in later life? A trust is a great way to do this.
