Pensions Advisers
Mortgage Advisers Ethical Advisers Long Term Care Female IFAs
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Pensions Advisers
Mortgage Advisers Ethical Advisers Long Term Care Female IFAs
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Article INHERITANCE TAX CASE STUDY: MR JONES Paramount Group Limited - March 2007 Financial Advisers in Leeds Mr Jones is aged 60, is married to Mrs Jones, who is aged 58, and they have one Son, aged 30. Mr and Mrs Jones have a flourishing manufacturing business, which they have built up over many years and in which his Son also works. Currently, Mr & Mrs Jones have Wills made years ago which leave everything to each other. Mr and Mrs Jones have savings and investments of £300,000, a property worth £700,000 and shares in the business valued at some £510,000 (Mr Jones) and £490,000 (Mrs Jones). They have income of £100,000 per annum with average outgoings of no more than £70,000 per annum. Also they have made prudent pension provisions, so they expect a comfortable retirement in due course. Whilst the Son is happy to work in the business to support his Parents, he doesn’t have the same passion for it as his Father. Consequently, it is likely the business will be sold at some point in the future. Mr & Mrs Jones are keen to pass as much of their wealth on to their Son as they can without incurring an Inheritance Tax (IHT) liability and without unduly impacting on their standard of living. If Mr & Mrs Jones were to die in an accident in the 2007/8 Tax Year, Inheritance Tax of £280,000 would be payable. This is arrived at as follows:
The first issue to note is that there is only one Nil Rate Band applied, which results from the terms of the Will (and joint property ownership), which leaves all the assets in the hands of the survivor of Mr & Mrs Jones before they pass to their Son. There is no Inheritance Tax on assets passing between a Husband and Wife or between Civil Partners. The first planning point, therefore, is for the Wills to be rewritten to make use of the Nil Rate Band on both deaths. This is usually achieved by creating a Discretionary Trust under each Will with each other, the Son and any Grandchildren as potential beneficiaries. In this way, the survivor of Mr & Mrs Jones has access to the funds, if needed, but if not they are effectively in the hands of the subsequent generations already. This would save £120,000 in IHT (£300,000 @ 40%). The next planning point involves the Business Property Relief (BPR) (100% relief for assets employed in a trading company), as the above example assumes the business is still owned, but what if it was sold? The proceeds would become taxable, increasing the potential IHT liability by £400,000 (£1,000,000 @ 40%). To mitigate this, two things should be done, as follows:
The final planning point is, assuming all the above has been done, there is still a residual potential liability of £160,000, so what can be done with this? IHT is a capital, not an income tax; consequently, there is an exemption for normal, habitual expenditure out of income. Mr & Mrs Jones can use their surplus income to fund a Life Assurance policy, which would be written under a simple Trust for the benefit of their Son (and his Children) and payable on the second death. On a reviewable contract, assuming acceptance on standard, non-smoker terms, the premiums would be £140.34 per month (source the Exchange). Mrs Jones life expectancy is some 25 years, so the total cost of premiums would be in the order of £42,000 for the £160,000 cover. Guaranteed premiums would be £223.28 per month an expected lifetime total of around £67,000. No saving in IHT is achieved as such, although, if not expended on Life Assurance, the accumulation of surplus income would be exacerbating the IHT problem year by year. However, it can be seen that this is a cost-effective way of mitigating the liability without impacting seriously on Mr & Mrs Jones’ standard of living. Clive Barwell TEP FSI Cert PFS Director Paramount Group Limited Visitors are strongly urged to consult with a qualified financial advisor before making any investment decision. Neither searchifa.co.uk nor any person involved with the running of this website can be held responsible for any investment decisions made by our visitors.
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