Case Study #2

Married couple with current assets of around £5 million

Clients Situation

Mr and Mrs Hill were in their mid 60s and had both been fully retired over 5 years.

  • Mr Hill had a net final salary pension income of just over £65,000 a year including his state pension. Mrs Hill pension income was just over £50,000 a year net including state pension. They were spending around £50,000 a year jointly and so had significant surplus income.
  • Their main residence was valued at around £2.5 million in which they wanted to remain long term with no plans to sell unless they went into care.  They had a joint investment portfolio of just over £2.4 million (around £500,000 in equity ISAs) and around £200K in cash. They did not draw any income from these investments and were, in fact, adding to them annually at around £60,000 a year from excess income.
  • Mr and Mrs Hill also had around £400,000 in personal pensions which were not being used for income.
  • Their total current Estate (excluding pension which are already in trust) was £5,100,000 on which their current IHT liability was £1,780,000. The Residential Nil Rate Band is lost as the Estate is over £2.7 million.
  • Mr and Mrs Hill were married with two married sons who were higher rate tax payers and had four young (under 12) grandchildren who they wanted to help to pay towards private education.
  • The main concern in this case was around inheritance tax and if one of their sons got divorced.
  • Mr and Mrs Hill were adding to their capital annually and the value of their assets was growing. It was projected that their IHT problem could in fact easily double (probably more) by the time the second spouse died.
  • They did not want to simply give money to their working children as they were concerned they would need capital in the event they need long term care. However, they were keen to eliminate any IHT for their children.
  • They were both higher rate income tax payers for income tax purposes.

The problems the clients would have incur if no action was taken

The problems the clients would have incur if no action was taken

  • Mr and Mrs Hill were adding to their capital annually and the value of their assets was growing. It was projected that their IHT problem could in fact easily double (probably more) by the time the second spouse died.
  • They did not want to simply give money to their working children as they were concerned they would need capital in the event they need long term care. However, they were keen to eliminate any IHT for their children.
  • They were both higher rate income tax payers for income tax purposes.

The recommended solutions

  • Bluebond worked with Mr and Mrs Hill to determine and agree an overall long term strategy and Bluebond carried out the detailed work and put some of the plans into place.
  • Bluebond advised to discuss Family Investment Companies as a potential solution. After full discussions they decided not to proceed with this particular strategy.
  • Bluebond also advised that they gift £6,000 a year to their children and grandchildren to use this allowance as the figure adds up over the years to reduce the IHT liability.
  • Bluebond recommended that Mr and Mrs Hill should gift £60,000 a year to their children and grandchildren using the gifts out of normal income IHT exemptions.
  • Bluebond suggested that they should work with our IFAs if annual investments into Business Relief Investment Plans were suitable.
  • Bluebond's Trust company and Lawyers set up new Wills and separate Trusts for the clients.
  • Mr and Mrs Hill were introduced to our recommended firm of Independent Financial Advisers who, over a series of steps, agreed and set up the following plans :
  • Joint life second death standard policy in Trust – paid by fixed fee.
  • Joint life second death maximum policy – paid by fixed fee.
  • Investment of £650,000 into two offshore bonds held subject to two Reversionary Trusts.
  • Reviewed and advised on the existing pensions and investment portfolio and moved some to a Discretionary Fund Manager.
  • Set up new pension funds for the children and all grandchildren into which £60,000 a year was paid by Mr and Mrs Hill from excess income.
  • Advised on how best to sell down their existing investment portfolio over the coming 7 years to maximise use of their Capital Gains tax annual allowances.
  • Advised Mr and Mrs Hill annually on investments into Business Relief investment schemes to save inheritance tax and retain access to that capital.
  • In the future look into an equity release plan to reduce the Estate further and gift the money into Trusts or directly to their children.
Benefits of 6 Trusts
Benefits of Life Policy
Benefit of Reversionary Trust
Benefit of pensions and investments review
Benefit of setting up pension funds for sons and grandchildren
Benefit of slowly selling down their investment to use their annual CGT allowances

Benefits of solutions used

Benefits of solutions used

Benefits of 6 Trusts
Benefits of Life Policy
Benefit of Reversionary Trust
Benefit of pensions and investments review
Benefit of setting up pension funds for sons and grandchildren
Benefit of slowly selling down their investment to use their annual CGT allowances

Annual Review

As part of the plan, Mr and Mrs Hill would hold a regular annual reviews with both Bluebond and the recommended IFAs to ensure the plans were adjusted as required in case of changes to circumstances or tax rules. It was also agreed that as they got older that their children would attend the annual review meetings with Bluebond.

Should it have arisen that one of the clients died earlier than expected and that there was insufficient time to gift away another £650,000 in 7 years time, then a Family Investment Company would have been suggested. As the assets were mainly in the main residence and investments, Mr and Mrs Hill preferred the simplicity of Trusts, investments into Business Relief Plans and outright gifts.

Benefits :

  • Reduce the IHT even further
  • Reduce the cost of the life insurance plans

The plan for Mr and Mrs Hill is quite complex due to the size of the Estate. However, by dealing with in in stages together with their sons meant that they were able to achieve all of their objectives in eliminating their IHT liability. In this they would not be funding their son's lifestyle to too high a degree and protecting the whole Estate, keeping the money in the family bloodline. They also had unexpected benefits of saving a lot of income tax.

Summary

Summary

The plan for Mr and Mrs Hill is quite complex due to the size of the Estate. However, by dealing with in in stages together with their sons meant that they were able to achieve all of their objectives in eliminating their IHT liability. In this they would not be funding their son's lifestyle to too high a degree and protecting the whole Estate, keeping the money in the family bloodline. They also had unexpected benefits of saving a lot of income tax.

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