Once Paul & Wendy had settled into retirement their thoughts began to move toward how to ensure their children inherited their estate in a tax efficient manner.
The first step was to review their Wills and ensure that suitable Lasting Powers of Attorney were created and registered to ensure their affairs could be managed if they no longer had the physical or mental capacity to do so themselves. We arranged for their Wills to be updated ensure those they wished to benefit from their estates would do so, whilst at the same time protecting one another through the rest of their lives. This included the insertion of Nil Rate Band trusts to ensure they retained as much of the Residence Nil Rate Band as possible, in this instance saving over £100,000 in potential inheritance tax.
The next step was to ensure sufficient money was ringfenced to meet their expected living costs for the rest of their lives, as well as helping to meet any care costs should they arise in future. After we established how much money they needed to have available to them to provide an income now, with access to their remaining capital if needed, we set about how to reduce a potential inheritance tax liability.
Some outright gifts were made to their children to help them whilst they needed the money the most. Part of the gifts fell within their annual exemptions (including the prior tax year being unused and carried forward), whilst the rest were treated as potentially exempt transfers, only falling outside of their estates after 7 years from the date of the gifts. As they had made these gifts early enough into retirement it was considered more likely than not that they would fall outside of their estates.
After the outright gifts we reviewed the wide range of planning solutions available to them including Discounted Gift Schemes, Loan Trusts, investing in shares on the Alternative Investment Market (AIM), Enterprise Investment Schemes (EIS) as well as other tax efficient planning benefiting from Business Relief managed by specialist firms in areas such as forestry, commercial storage units, residential and commercial property development, renewable energy and nursery/healthcare businesses – to name a few.
This is a complex area requiring careful planning, especially considering each solution takes a varying level of time to achieve the intended IHT outcome, and so Paul & Wendy took their time to invest in a range of these options over a few years. Ultimately all the capital that they invested into these schemes fell outside of their estates reducing their inheritance tax liability.
Later in life, as their spending reduced, we arranged for Paul & Wendy to take advantage of a further IHT exemption whereby they can gift any excess income that is not required to meet their standard of living, directly to their grandchildren. This was just another part of their ongoing wish to keep their potential IHT liability down by keeping any increase in the value of their estate to a minimum.
Whilst it is unlikely Paul & Wendy will reduce their inheritance tax liability to zero this series of steps, carried out over many years, has helped to significantly reduce the amount of tax that could be paid on the second of their deaths and, additionally, given them peace of mind that their wishes (either via their Wills on death or Lasting Powers of Attorney during life) can be enacted as they would prefer by their executors and/or Attorneys.