Case Study – Client with current assets in excess of £5 million

Clients situation

Both the clients were in their late 60s and had both been fully retired over 5 years.
  • He had a net final salary pension income of just over £65,000 a year including his state pension and her pension income was just over £50,000 a year net including state pension. They were spending around £50K a year jointly net 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.
  • They 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.( they lose their residential Nil Rate Band allowance as the Estate is over £2.7 million.
  • They were married with 2 married sons who were higher rate tax payers and had 4 young (under 12) grandchildren who they wanted to help to pay towards private education.
  • Their main concern was around Inheritance tax and if one of their sons got divorced.

The problems clients would incur if no action was taken

  • They were both in quite good health. It was assumed that as they were adding to their capital annually and the value of their assets was growing that the IHT problem could in fact easily double (probably more) by the date the second spouse died.
  • They did not want to simply give money to their working children as they were concerned in the event they need long term care but definitely wanted 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 them to determine and agree an overall long term strategy and recommend other firms to carry out the detailed work and put some of the plans into place.
  • Bluebond advised they should discuss Family investment companies as a potential solution with our recommended accountants.
  • Bluebond advised they gift £6000 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 advised ask their IFAs if they should gift £60,000 a year to their children and grandchildren and investigate if placing those money into pensions plans for all of them was suitable
  • Bluebond advised they should ask their IFAs if annual investments into Enterprise investment plans were suitable to save on income tax
  • The recommended trust company and lawyers set up new wills 9 separate trusts for the clients
  • The clients were introduced to a 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
  • Invested £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 the clients from excess income
  • Advised the clients 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 the clients annually on investments into Enterprise investment schemes to save both Inheritance tax and income tax
  • 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 solutions used

  • This planning ensured that should any of their children or grandchildren go bankrupt or get divorced the money left to them was safeguarded. This was a major issue bearing in mind the size of the estate.
  • Should they eventually decide to gift excess capital later on the trusts would already exist.
  • There was also a potential good IHT saving if in the likely event there was more than a one year gap between either spouse dying. This probable IHT saving would easily cover all the costs of setting up the trusts making it an easy decision for the clients.
  • Both plans together ensured that the IHT problem was solved immediately.
  • The clients understood that in the long term this would be a very expensive method of solving the problem
  • Other plans would be needed to reduce income tax and the cost of avoiding the IHT
  • This placed £650,000 outside of the estate for IHT purposes after 7 years
  • These funds were to be considered a giant emergency fund as it gave the clients access to the capital back if required over a period of 7 years – possible if long term care was ever required
  • After 7 years the maximum policy cover could be reviewed and reduced
  • The new investment portfolio matched the client’s attitude to investment risk better and had a potential for higher returns should the discretionary fund manager continue with the good performance and risk management they had already demonstrated.
  • This avoided their assets increasing over time by the excess income being added to capital
  • It put the money into pensions which for both sons attracted 40% relief as they were both higher rate tax payers.
  • The sons could not access the funds until age 55 and so their lifestyles were not being funded as it was also agreed both sons would also fund the pensions from their extra tax relief.
  • They set up pension funds of £3600 per year for each grandchild to grow tax free over a long period of time.
  • They would make a further gift into trust for their grandchildren of £600,000 in 7 years time as their gift into trust allowance would be “freed up” again in 7 years time
  • They would use the trusts Bluebond had already set up for this purpose
  • The money could be used and extracted tax free to pay for university education
  • It could be used for a property deposit in the future
  • Trustees who are the clients and their children would ensure the money was not mis spent on frivolous things

Regular Annual review

As part of the plan the clients would hold a regular annual review 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 the clients 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 it was agreed with the clients that they preferred the simplicity of trusts and outright gifts

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


The plan is quite complex due to the size of the estate. However by dealing with in in stages together with the client’s sons meant the clients were able to achieve all their objects of eliminating their IHT liability, not funding their sons lifestyle to too high a degree and protecting the whole estate and keep the money in the family bloodline. They also had unexpected benefits of saving a lot of income tax.

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