Case Study Š Inheritance Tax planning

As client circumstances can be so varied, we thought it would be useful to use a series of case studies to detail some of the different financial planning challenges that your clients may face and how we have helped similar individuals to reach their financial goals. This issue, we begin with Inheritance Tax:

Circumstances

We were approached by Mr & Mrs Middleton in 2003, who had built substantial assets during the course of their lifetimes. Mr Middleton had been a Director at Rolls Royce and as well as having a substantial Pension, had also received generous numbers of shares through share options.

Objectives and concerns 

Mr & Mrs Middleton were concerned about their potential Inheritance Tax (IHT) Liability, which stood at several millions of pounds. They had already made significant outright gifts to their children and did not want to make any more for three reasons:

1 They wanted their children to ‘make their own way’ in life (as they had done) and did not want too much money being gifted to them to alter negatively the choices their children might otherwise make. 

2 They were aware of the horrible divorce statistics and did not want their children’s and grandchildren’s monies going to an ex-spouse.

3 They had heard of a situation where a child of a similar age to their own had died and his widow inherited his Estate, which was primarily made up of gifts and a large inheritance from his parents. At first this was not a problem but as the deceased’s wife was relatively young, she eventually remarried, had more children and the monies were not used how they would have been by their son had he survived, or in a way originally agreed when the gifts were made.

In short Mr & Mrs Middleton realised that they had to get the balance right between not gifting more than they might regret and seeing their children benefit and enjoy the monies during their lifetime. It was certainly no good giving them £millions on their death (as by that time they might already be financially secure).

Planning arranged 

We discussed different types of Trust structures that would enable them to get the assets outside of their estates for IHT purposes, whilst keeping control of the monies as Trustees. We looked at some cash flow modelling projections, which showed them whether they could afford to make the gifts they were considering. They ended up setting up four different types of Trust. 

Some of the Trusts enabled them to achieve immediate IHT savings, whilst some took the same seven years as the outright gifts they had made to their children previously. Most of the Trusts restricted them from being able to benefit from the Trust, however, some were arranged in such a way that they could receive capital in the future if they needed it to give them added peace of mind.

Even after we arranged this planning, they realised they would never get their IHT liability down to zero and so we arranged some high value, specialised Life Assurance policies on their behalf, again held in Trust. These are not like other insurance policies (which might not ever pay out), these policies will definitely pay out - it is just a question of when. The other attraction with these policies is that once they had been underwritten, Mr and Mrs Middleton knew that their children would receive the full value of the life cover and they did not have to survive for seven years to get the full benefit of the planning!

Review 

We review Mr & Mrs Middleton’s situation at least annually. Due to the continuing growth in their Estates, we quickly identified that their Estate was increasing each year (even with them making substantial gifts from surplus income). We are currently undertaking some further planning for them to deal with this issue, however, had they not started their planning in 2003 their potential IHT liability would be more than £1million more than it is at present. Also, as Mr Middleton has recently suffered from ill health, he might now be unable to secure any Life Assurance (if he could, it would be much more expensive). The other significant benefit of the planning arranged is that it will help their children and grandchildren save IHT, as the Trusts can continue for other generations.

Who can help put a sensible plan into place?

Professional Financial Centre (East Midlands) Ltd has helped many clients like Mr & Mrs Middleton to put a sensible financial plan into place for the rest of their lives. When looking at the arrangements available we are able to prove that we have your interests at heart. As changes happen, we review our clients’ plans, adjusting them to meet changing economic circumstances and family needs. 

Due to the complexity of this area of planning, we recommend taking professional, holistic financial advice. By looking at a client’s overall personal, pension and business assets together we have been able to save our clients millions in unnecessary lifetime and death taxes.

As a result of our qualifications, experience and culture, we qualify to be included on the SIFA Professional Directory of IFA’s, which is endorsed by the Law Society. 

As a member of the Derby Law Society, by quoting code LS1 you and / or your clients will receive a 5% reduction in our costs.

Richard Shanks (Managing Director)

Professional Financial Centre (East Midlands) Limited

Wesley House, St Michael’s Lane

Derby

DE1 3DW

01332 341406

Authorised and regulated by the Financial Services Authority. This article is not a recommendation and you should obtain appropriate advice before acting on any of the information provided