Inheritance Tax Planning

Case Study

Background

Inheritance Tax

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.

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David has been financial adviser to my wife and myself for a number of years now.
I have always been impressed by his market knowledge , and desire to find solutions for retirement/investments that are best suited to our personal situation.
In addition,David helped to progress a critical illness claim after a fall at home 5 years ago ,resulting in premature retirement, when the company concerned was less than helpful initially.
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Dr M G

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Retired Psychologist
David always gives me exceptional advice, always taking care to make sure he understands my personal requirements. He visits my home at a time convenient to me and on his last visit, he potentially saved me thousands of pounds by working out that I could pay off my mortgage and invest the money saved in a more appropriate pension fund. Win, win! I am a single parent and don’t earn a huge salary. Financial advisers are for everyone though and I am delighted with the advice I have received. See you next year David.

Miss A. M.

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Mrs A.G.

Retired
I have known David Vance for approximately 14 years. Over that period, he has handled my Pensions and Investments. His knowledge and financial advice have stood me in good stead.
I would recommend him to anyone requiring impartial financial advice.

Mr W. O.

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Mr J. S.

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Honesty and integrity are important factors to me and Vance Financial Management are a company that I highly recommend.

Mr A. W.

Retired
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Mr M. S.

Retired

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