Allan Ross, IFA, Ware - Mitigating Inheritance Tax

Tuesday 11 July, 2017

Mitigating Inheritance Tax & Meeting Education Costs for Grandchildren

This case study ‘Mitigating Inheritance Tax & meeting education costs for grandchildren' is part of our ‘The value of an independent financial adviser’ series. Read Simon Hawker, independent financial adviser St Albans – The value of an independent financial adviser.

Allan Ware is an independent financial adviser in Ware, Hertfordshire. Allan is a member of our Ware financial planning team.

Current situation

Allan Ross, independent financial adviser, Ware, specialises in estate planning.  Allan Ross’s area of expertise is advising clients on how to properly mitigate inheritance tax.

Mr and Mrs J met Allan Ross ten years ago when they took financial advice and invested £80,000 into two onshore capital investment bonds worth £40,000 each. The original reason for the investment was to boost their income in retirement as Mr J was still working at the time. They are both now retired. The bonds have grown in value and are currently worth £100,000. They realise that they do not need any income from these investments and it is unlikely they ever will, yet they continue to grow within their estate.  The couple’s main residence is worth £500,000 and they have other investments in the form of ISAs and cash savings worth £500,000. Mr J also has a personal pension worth over £400,000 which Allan advised Mr J to leave untouched as he did not need to withdraw any of the money. 

How Allan Ross, IFA Ware, add value with his independent financial advice

1. Offered Mr and Mrs J an alternative financial solution 

From speaking with the couple Allan Ross realised how important their grandchildren were to them, so he suggested they make a gift to them now.  Mr and Mrs J approved of this idea.  Allan Ross discussed the likelihood that the couple would pay inheritance tax on their savings if they did not engage in inheritance tax planning.  He recommended they placed the proceeds of their two onshore capital investment bonds into an offshore bond in trust for their grandchildren to support the cost of their future education.

2. Recommended a tax-efficient offshore bond as a gift to the grandchildren

As Mr J is a higher rate tax payer, Allan Ross recommended that Mr J sign over his 50% share of the capital investment bonds to his wife who is a non-tax payer to avoid the extra 20% tax that would be paid on his share of the £20,000 gain. The £100,000 was then reinvested into a discretionary trust for their grandchildren via an offshore capital investment bond. The offshore bond was chosen because it had the following advantages:

• It will allow the trustees to assign full segments of the offshore and onshore bond to the grandchildren when they reach eighteen years of age. As there is a strong possibility that the grandchildren won’t be earning anything at that age they will have a personal allowance of £11,000 per annum (based on 2016/17 figures) at their disposal before paying any tax. 

• There is also no tax paid on the first £5,000 per annum of chargeable gain withdrawn from an offshore bond because the starting rate band for savings can be offset against this type of income.  

• You can also withdraw 5% of the original investment each year from the offshore bond without any immediate tax implications. This can be rolled over for every year it is not taken.  The 5% allowances are included in the final gain calculation on full encashment.

• Offshore bonds also benefit from ‘gross roll up’ so the investment within the bond grows free of income tax and capital gains tax at source.

Key considerations for anyone looking to mitigate inheritance tax

• Discuss future financial costs openly with your independent financial adviser

• Use cash-flow planning tools to plan for different eventualities and worst case scenarios

• Be receptive to using flexible and tax-efficient investment products in your financial planning

• Consider ways to mitigate your inheritance tax.  For example leave a legacy to a grandchild.

Summary

Mr and Mrs J are really appreciative of Allan Ross’s independent financial advice.  They are delighted to be able to gift money to their grandchildren whilst still retaining control of the bond as trustees of the discretionary trust.  They understand that if Mrs J lives more than seven years after the gift is made there will be no outstanding inheritance tax associated with it. 

Please note The Financial Conduct Authority does not regulate tax or estate planning.

Other case studies in 'The value of an independent financial adviser' series:

Mark Bowen, independent financial adviser, St Albans - Reviewing your defined benefit pension scheme,

Deb Nolan, independent financial adviser, Leeds / Bradford – Understanding your financial entitlements. 

Simon Prestcote, independent financial adviser, Barnet, North London – Generating an income following a property sale.  

Neil Homer, independent financial adviser Stafford - Modelling different financial planning scenarios.

Simon Armstrong, independent financial adviser St Albans - Investing the proceeds of a business sale

Richard Porter, independent financial adviser, St Albans – Generating tax efficient retirement income

Daniel Stansall, independent financial adviser, Barnet – Monitor your investment plan to avoid portfolio drift

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