Inheritance tax planning
Margaret is aged 75 and is in good health. She is divorced with two children and three grandchildren. It is very important to Margaret that, in the event of her death, her estate passes on to her family as tax efficiently as possible.
Margaret is aged 75 and is in good health. She is divorced with two children and three grandchildren. It is very important to Margaret that, in the event of her death, her estate passes on to her family as tax efficiently as possible. Although she is concerned about the impact of Inheritance Tax (IHT) on her estate, she does not wish to make outright gifts to the family at this stage. Her children are financially secure and she would prefer to leave funds to her grandchildren at a time when they are financially mature.
Margaret owns her own property, has cash in bank and building society accounts along with ISA investments. She also receives secure pension income but would like to increase this by £10.000 p.a. She is concerned about the future potential cost of long term care and wants to retain absolute control of some of her capital, keeping some available as a cash reserve for emergencies.
Taking into account the nil rate band (NRB) of £325,000 and the residence nil rate band (RNRB) of £175,000, £350,000 of Margaret’s estate will be subject to IHT at 40% resulting in an inheritance tax bill of £140,000.
Principal residence (mortgage free) - £500,000
Cash deposits - £150,000
Individual Savings Accounts - £200,000
Total pension income - £25,000
Initial IHT due on estate (£350,000 in excess of NRB/RNRB) - £140,000 tax
In order for Margaret to increase her income by up to £10,000 p.a., from investments, she would like to invest £300,000 of her available capital into IHT efficient investments whilst maintaining flexibility.
Invest £100,000 in IHT exempt investments, such as a scheme qualifying Business Relief (BR). Provided the investments are held by Margaret for a minimum of 2 years and continue to qualify for BR under current legislation they will be exempt from IHT in the event of her death. This type of investment carries a higher degree of investment risk which Margaret is comfortable with given the potential tax saving. This enables Margaret to reduce her overall IHT liability whilst keeping full control and ownership of her capital.
Invest £200,000 into a Loan Trust. The Loan Trust is established on a discretionary basis, Margaret being the settlor and trustee, her children also being trustees, and her grandchildren and future grandchildren as beneficiaries. Margaret gives the trustees an interest-free loan of £200,000 which is invested. Margaret can withdraw up to 5% each year (£10,000 pa) as a tax deferred income. On this basis after 20 years the loan would be repaid and she would not be entitled to any further repayments, however, the entire value of the trust fund would be outside her estate for inheritance tax purposes. Should she die before she has received the full amount of the loan, then it is the value of the outstanding loan that will be inside her estate for inheritance tax purposes, not the value of the fund.
Margaret can arrange a deed of gift from the loan trust of £3,000 pa to make full use of her annual gift allowance, which would be immediately exempt from IHT (the gifted sum can remain invested within the Trust). If at some point in the future Margaret doesn’t require any further access to the capital / loan repayments, she can waive the remaining loan which would create a potentially exempt transfer (PET), which would then fall outside her estate after 7 years.
IHT Saved - £140,000
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