Inheritance Tax Case Studies
Discounted Gift Trust
Mr A had assets worth £500,000: a family home worth £300,000 and £200,000 held in cash accounts in the tax year 2005/06.
Following a meeting with James Mann, Independent Financial Adviser at Simpson Millar Financial Services, he realised that his estate could potentially have an inheritance tax liability of £90,000: 40% of the £225,000 that exceeded his £275,000 nil rate threshold. Mr A’s wife’s nil-rate band had already been used.
He was concerned that his two daughters would not be left with the level of inheritance he had anticipated and wished to mitigate some of his estate’s tax liabilities while also increasing the level of regular monthly income he received. After discussing various options, a discounted gift trust was agreed to be the most suitable option to meet Mr A’s needs.
Mr A also needed to keep a contingency fund in a deposit account for short-term expenditure. £150,000 was available for Inheritance Tax Planning at the time. In December 2005 he placed £150,000 into a Discounted Gift Trust and received a discount of £60,000 which was immediately deemed to be outside his estate – saving £24,000 in inheritance tax immediately. The remaining £60,000 (the gift element) remained within his estate for seven years.
Monthly £625 withdrawals were set up (5% of the initial investment value) and will continue at this level for the rest of his life.
In December 2012 the gift element, having been held for seven years, was now deemed to be outside of his estate for IHT purposes. This reduced the inheritance tax liability by a total of £60,000 (£150,000 x 40%).
Mrs B had assets totalling £691,000 which included the value of her family home and approximately £450,000 held in various cash accounts and investment plans.
She had a potential inheritance tax liability of £366,000 after the use of her £325,000 nil-rate threshold for the 2011/12 tax year.
Because she received a sufficient monthly income to cover regular outgoings and provide some disposable income, she did not anticipate requiring anything further in the future.
In January 2011, Simpson Millar Financial Services helped Mrs B place £400,000 into an AIM-portfolio to reduce her estate’s inheritance tax liability within a two-year time frame.
Being an experienced investor and having previously held a portfolio of investments, she was comfortable subjecting the funds to a relatively high level of risk.
In January 2013 the £400,000 plus investment growth qualified for Business Property Relief. This meant that the AIM-portfolio would be fully disregarded for inheritance purposes – saving Mrs B’s estate £160,000 (40% of £400,000) in inheritance tax.