CASE STUDIES – IHT MITIGATION

TThe financial problem - A couple in their late 50’s wanted to look at giving away only the growth in value on some of their capital, in favour of the growth monies passing to their children when the survivor of the two of them dies.

In the meantime they wanted to be able to have an income from their capital and wanted to be able to have access to the whole of the principal sum if needed.

A Solution  - Our advice involved setting up a trust where the couple made a loan of some of their capital into the trust. They as the settlors set up the trust, appointing the trustees (themselves and two of their children) and naming beneficiaries as their children.

During their lifetime they retained full access to their capital and when required in the future this could be repaid to them in annual instalments to provide income.

Here the trust provisions ensure all subsequent growth on the amount placed in trust does not form part of their estate for IHT purposes.

All growth on the capital invested is therefore always exempt from IHT. As an example, let us assume the sum of £100,000 placed in this trust then doubled in value over 15 years. When the survivor of our couple dies, £100,000 will be exempt from IHT.

The financial problem – This couple in their early 60’s realised there would be a large inheritance tax liability on the death of the survivor of them.

They had already made full use of Will planning but were not willing to make large gifts of capital to their children. They wanted to remain in control of their capital and the income it generated. They also were looking for a relatively simple and straight forward solution to IHT funding and mitigation.

A Solution - Our advice allowed this couple to gift just a quarter of 1% of their total assets each year into trust for the children. This worked out at just £1,800 a year payable monthly at £150. This would generate sufficient monies in trust to meet IHT from the date of the first monthly payment into trust.

This would be payable upon death of the survivor of the two of them – a sum of £250,000. The great benefit was that each year the couple retain 99.75% of their assets and the income they generate for themselves.

The financial problem - Yet another couple, this time in their early 70’s, had significant means but felt unable to give their children a significant capital sum unless they could retain a lifetime right to the income it generated. They needed the income to be sure of maintaining their standard of living and to provide for future care needs if needed.

A Solution - Here our advice meant setting up for this couple yet another type of trust. With this type of trust they again make a gift of capital to trustees. As before the trustees then invest the money for the beneficiaries. During their lifetime they retain a right to income that will be paid annually with the level of income fixed at 5% at inception.

The gift of capital is again a potentially exempt transfer (PET). If they survive for 7 years after making the gift, the transfer will fall out of their estate for IHT purposes. The value of the PET will be less than the amount gifted into the trust. This is because the PET is calculated as the amount they gifted into the trust less the value of what they retained (their right to annual payments for their lifetime).

The actual value after allowing for the above is governed by their age, sex and the income taken as annual payments to them.

The discount on the gift made is likely to be around 22% so from say a total sum of £100,000 only £78,000 counts as a PET that will fall out of the estate once 7 years has elapsed. In effect, £22,000 is removed from counting for IHT from their estate from the date the gift is made to the trustees and invested for the beneficiaries.

So here they gift all the money away and have no right of access to the capital. They do however have a right to income for their lifetimes. As an example, let us assume they placed £100,000 in this trust and it increased in value over 20 years to £150,000. When the last of our couple dies, then £150,000 will be exempt from IHT. In the meantime they might have enjoyed up to £5,000 a year tax deferred income.

The financial problem – A widow aged 80 has a sizeable estate and IHT in excess of £100,000 would be payable upon her death. She was not confident of living for another 7 years.

A Solution - Gifting capital was not likely to be a solution because the sums will be likely to count as being part of the estate if she died within 7 years.

For this widow we adopted a solution we have been using for clients since 2003. We placed some of her capital in an AIM share portfolio in March of 2003. £100,000 was invested with IHT mitigation in mind. Once these particular shares have been held in her name for 2 years they become exempt from IHT. At the time of writing this for our website the value of her portfolio after all charges has increased to a good deal more than £200,000.

Currently, our client is very happy with the way matters are progressing. That said, both she and her two sons accepted that the shares could fall as well as rise in value and are higher risk investments. All were involved from the conception of our ideas to mitigate tax and all agreed to the strategy to be adopted.