Case Study – Meet Elizabeth and Tim
Elizabeth and Tim are both 70 years old and are concerned by the amount of potential inheritance tax payable on their estate. They have assets of £1,300,000, which includes the family home worth £750,000. Tim’s health has deteriorated recently and he would also like to know that Elizabeth is financially secure.
They have an income of £40,000 per annum, however more than half of this is provided through Tim’s final salary pension, which will reduce by 50% if he dies.
Elizabeth and Tim do not want to give away funds to their 2 children, as they want to use the capital to help fund any future care requirements that they may have.
They have £224,000 of savings held in bank based cash ISAs and a £326,000 investment portfolio, which has increased in value by £60,000.
Over the next few years, the introduction of the Residence Nil Rate band from April 2017, will help to reduce their inheritance tax liability as the additional £175,000 allowance per person is phased in, for people who leave the main family home to a direct descendent.
As interest rates have decreased recently, Elizabeth and Tim have invested more and more money to try and get better returns. This has resulted increased the value of their net worth, which has only compounded their inheritance tax liability.
Following our advice, Elizabeth and Tim agreed to restructure their investments.
The investment portfolio was sold and whilst this created a capital gains tax (CGT) liability for Elizabeth and Tim, we deferred the tax liability by investing in to a Venture Capital Trust (VCT) and using CGT allowances. Investing in VCTs also created income tax relief, which meant that Elizabeth and Tim paid no income tax in the 2014/15 tax year.
The cash ISAs were transferred into investment based stocks and shares ISAs, and half of the portfolio was invested in an AIM ISA portfolio to attract Business Property Relief. This resulted in half the value of the portfolio being exempt from inheritance tax after 2 years. The remaining half of the ISA portfolio was invested in a cautious portfolio of funds to provide tax free income and growth.
The encashed investment portfolio was re-invested into 2 investment bonds. Whilst investment bonds do not provide any inheritance tax saving, they can be placed into Trust in the future, and they can also be used to provide a tax deferred income, which is something that Elizabeth and Tim found attractive.
The combination of the introduction of the residence nil rate band and investing into an AIM ISA portfolio to attract business property relief reduced their overall inheritance tax liability. An AIM ISA portfolio was used as they wanted a quicker solution due to Tim’s declining health and they did not want to gift assets away, which takes 7 years to be outside of their estate for inheritance tax.
AIM portfolios and VCTs are classified as high risk investments and only suitable for clients willing to take such risk. The availability of various tax reliefs should not cause you to overlook the risks inherent in such structures and you may not recieve back all the capital you invest.