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Case Study – Client with current assets in excess of £1.5 million

Clients situation

Both the clients were in their mid 60s and had both been fully retired over 5 years.
  • He had a net final salary pension income of just over £35,000 a year including his state pension and her pension income was just over £25,000 a year net including state pension. They were spending around £50K a year jointly net and so had a small surplus income.
  • Their main residence was valued at around £800,000 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 £700,000 and around £100K in cash. They did not draw any income from these investments and were in fact adding to them annually at a few thousand a year from excess income.
  • He also had around £200,000 in personal pensions which were not being used for income.
  • Their total current estate (excluding pension which are already in trust) was £1,600,000 on which their current IHT liability was £880,000 (once the Residential Nil Rate Band is £175K each in April 2020)
  • They were married with 2 married children who were basic rate tax payers and had 2 young (under 15) grandchildren who they wanted to help to pay towards private education.

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 basic rate income tax payers for income.

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 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. However they asked their children to keep this money in an ISA just in case it was required. They understood in the event of their children’s divorce that the money gifted would be at risk.
  • The recommended trust company and lawyers set up new wills and 4 separate trusts for the clients and their children.
  • 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 was suggested but they decided not to proceed on that plan as they felt it was not the best use of funds and they would ensure they gifted money away on time as they felt at least one of them would survive 15 years.
  • Invested £325,000 each into two offshore bonds held subject to two reversionary trusts.
  • Reviewed and advised on his existing personal pensions and moved it to a discretionary fund manager for better risk management an potential for higher returns.
  • 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 – only if the property value exceeded £1 million in the future.

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.
  • The policy ensured that the IHT problem was solved if the value of their home and chattles eventually exceeded £1 million.
  • Other plans would be needed to reduce 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
  • The maximum gift into trust of £650,000 meant it only left them £150,000 is cash and investments. They felt they would gift £100,000 at their children when the youngest of them was 75 in 10 years time ( or earlier if required) giving the gift 7 years to fall outside of their estate.
  • 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.

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.

If they could not afford the £6000 a year from income they would use some of the £100,000 left after gifting to the reversionary trusts to fund this money. They trusted their children to return the money if required.

Summary

The plan is quite straightforward due to the size of the estate. However by dealing with in in stages together with the client’s children meant the clients were able to achieve all their objects of eliminating their IHT liability, and protecting the whole estate and keep the money in the family bloodline.

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