A strategic approach to Inheritance Tax planning

Background

Jane is 60 and already retired, with a small occupational pension.

She has an estate of £1.5million, with an Inheritance Tax (IHT) liability of £425,000. Jane was keen to limit this liability so that as much as possible could be inherited by her daughter. Half of the estate was made up of her main residence and the other half consisted of cash-based investable assets.

Whilst she was aware that she had to take action to mitigate the IHT liability, Jane nevertheless wanted to retain access to her assets as she may need additional capital in the future.

What did we do?

After meeting with Jane in order to fully understand her situation, we recommended she establish a Whole of Life insurance policy. This could be used to fund some of her tax liability: a £300 per month policy purchased £250,000 of life insurance.

We also recommended that Jane establish a Flexible Reversionary Trust. This trust allows the trustees to advance annual maturities to the settlor if required; this would allow Jane to retain access to any amounts invested. After seven years, the amount invested would be outside of her estate for Inheritance Tax purposes.

Finally, we managed the remaining cash by maximising Jane’s annual ISA allowance and investing £3,600 per year into a pension to generate income tax relief. In the future, the ISA could be invested in shares that qualify for business relief; this would enable further tax savings to be made whilst enabling Jane to retain ownership.

The results

Whilst our solutions do not fully eradicate Jane’s tax liability, the strategy used allows her to retain access to all her assets. This will enable Jane to fund her retirement, whilst the Whole of Life insurance plan will cover the tax on the residential property.

More incremental planning will be recommended over the next few years.