A Solicitor recently introduced us to a client who wanted to undertake an estate planning exercise. The client is age 80, a widower, in excellent health, who has two adult children, with an estate worth c£13m and an Inheritance Tax (IHT) liability of c£4.8m. The client’s wife died ten years ago and whilst alive they had jointly made substantial gifts to their two children. The client is an additional rate tax payer and had just sold a second home in London with significant capital gains.
The client’s objectives are to reduce the IHT liability on his estate and to make lifetime gifts.
During an exploratory meeting we outlined the five key estate planning strategies;
- Dissipation spend it!
- Gifting surplus income and/or capital directly and/or via Trusts. Lifetime gifting to charity can result in a reduction in his tax (income, Capital gains and IHT). Where charitable gifts in his Will are more than 10% of his net estate (‘baseline amount’) his estate benefits from a 36% IHT rate (rather than 40%).
- Freezing e.g. loaning (directly or via Trust), so that any growth is outside of his estate.
- Converting assets currently subject to IHT into assets that are exempt e.g. farmland, forestry, quoted & unquoted trading companies etc. that qualify for Business Relief (BR).
- Creating a fund to meet the potential IHT liability written in trust which the Trustees could use to mitigate part or all of the current liability.
What is Business Relief (BR)?
A tax relief that enables certain business assets to be transferred to a beneficiary with a 50% or 100% reduction in Inheritance Tax. BR is available when qualifying shares in companies listed on the Alternative Investment Market (AIM) are held for two years.
The client’s accountant had not recommended or undertaken any tax planning in recent years. Our starting point, working with the accountant, was end of year tax planning with a recommendation to invest into two ‘knowledge intensive’ Enterprise Investment Scheme (EIS) in the 2021/22 tax year. The benefits are;
- 30% income tax relief in respect of the 2020/21 and 2021/22 tax years
- Capital gains tax deferral on part of the gain from the London property sale
- After 2 years benefit from Business Relief (BR) with up to 100% relief from IHT
What is the Enterprise Investment Scheme (EIS)?
EIS was introduced by the government in 1994 to help small companies raise funds and grow. Investing in an EIS-qualifying company means you could receive very significant tax breaks.
We then looked at the client’s Will to understand his legacies, which were a combination of children, nieces, nephews and charities. We agreed it made sense to ‘bring forward’ his planned legacies as he could easily afford to make substantial lifetime gifts of both capital and surplus income. The client agreed gifting now would make a material difference to the beneficiaries’ standard of living and provide them with the opportunity to demonstrate their appreciation!
The client was willing to invest in ‘higher’ risk estate planning solutions, hence EIS. Our next recommendation was to switch his existing ISA portfolio into a portfolio of shares listed on AIM (Alternative Investment Market) that would qualify for BR. The main benefits being retained ownership and, after 2 years, 100% IHT relief.
We also recommended; using a Charitable Aid Foundation (CAF) account to achieve both income tax and IHT savings; creating a fund from surplus income and an EIS for the 2022/23 tax year.
The potential IHT, Income Tax & Capital Gains Tax savings from the above recommendations totalled c£1.3m and in addition the creation of a fund totalling £800k that could be used to mitigate part of the residual IHT liability.
The client has signed up to our Complete Wealth Management Service whereby they benefit from ongoing financial planning advice and discretionary portfolio management with regular review meetings. This means that we can continue to ‘fine tune’ our estate planning recommendations and help the client to achieve further tax savings.
Note: Tax treatment depends on the individual circumstances of each client and this may change in the future.
Can we help you to protect your assets for future generations?
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