Cynthia (54) and her two siblings were concerned about the inheritance tax (IHT) that would be due if their mother Audrey (85) died. Her father died a few years earlier and did some planning but passed most of the estate to his wife under the will. His Nil Rate Band was used on his death.
The liability on the death of Audrey was approximately £730,000.
Audrey owned her main residence valued around £400,000 as well as a holiday home in Suffolk valued around £350,000. She also owned a commercial property in London valued at approximately £1.2m which provided her with rental income. In addition to this she had savings of £200,000. She had not made any gifts during her lifetime.
Her income, consisting of rental income from the commercial property, a spouse’s pension, state pension and interest on her savings, totalled approximately £7,000 pm, of which she required no more than £2,500 pm to live on comfortably. This surplus monthly income was accumulating in her bank account, adding to the value of her estate.
We discussed a number of options including selling the commercial property to free up capital, which would allow her to make large gifts to her children, setting up trusts and passing on her holiday home as well as enacting a whole of life policy to cover the full liability, as it would allow them to retain their family assets.
After much debate it was finally decided that she would pass a percentage of the commercial property along with her holiday home to her children immediately. These transfers were classified as potentially exempt transfers (PET) and Audrey would need to survive for seven years for the value of these gifts to escape inheritance tax. If Audrey died within this time, inheritance tax would become due on a PET and the person who received the PET would be asked to pay the tax, which could be substantial.
As a result, we established level term as well as a gift Inter-vivos life assurance policies, to provide the beneficiaries with funds to pay the potential liability should it become payable.
Although this did not completely reduce the IHT liability, it made a considerable reduction in the potential tax liability, and a more cost effective alternative to a policy covering the full liability on death.
Additionally, Audrey agreed to make use of her annual gift allowance of £3,000 as well as making regular gifts to her grandchildren out of normal income, which are considered as exempt transfers and do not require Audrey to survive 7 year before leaving her estate.
Finally, we suggested that due to that fact that the three siblings had their own substantial assets in their own right, it would be prudent for the gifts from Audrey to skip a generation to the grandchildren via trust thereby avoiding the same issues for their own estates in the future.
The case studies are based on real scenarios with specific client details removed to protect their identities.