Objective 7: IHT Mitigation Flashcards
Identify the additional information you would need to discuss with Alex to advise on the mitigation of IHT on his estate.
Full details of state of health
Confirmation of not other gifts over the last 7 years
His willingness to make lump sum gifts
Amount of capital he wants to gift or put in trust and the level of control he would want
How much capital he wants to retain for his children’s current needs
How much the additional childcare costs will be and how long
Where he is going to accept the reduced hours from employer
Whether he has stated the process to re-nominate his workplace pension scheme benefits
His willingness to use trusts
Willingness to use disposable income now to mitigate IHT
His willingness to increase funding writhing pension plans
His willingness to use inv to generate additional income for their needs
His desire to address IHT mitigation at this point
His views on leaving money to charity either in lifetime or death
His view on who he would use as trustees, attorneys or guardians for his children
Alex has experienced significant change to his financial situation following Tanya’s death. With the repayment of his mortgage and payout from Tanya’s DIS, he is worried that he may now have an IHT liability.
Comment on his situation once Tanya’s estate has been finalised, in relation to this financial objective.
He has 2xRNRB available which is £350k as his property is worth more than this and he plans to leave his estate to his children
No lifetime gifts recorded on factfind
As all assets were left to Alex he will benefit from spousal exemption so he full NRB is available to Alex on his death
Just experienced a traumatic event - need time to adjust and understand their situation, work, childcare etc
Vulnerability needs to be taken into account b4 gifting
Can nominate Tanya’s pension to FAD and renominate children so it remains outside estate for IHT purposes
Alex can nominate his own pension to children to keep these funds outside his estate
Alex’s estate value will be £1,028,000 after both his and Tanya’s NRB and RNRBs, this would leave £28k subject to IHT
£28k x 40% = £11,200
It is likely his estate will fall naturally over the next few years as he caters for his children’s needs, especially if reduces work hours
The IHT liability may therefore be temporary
He has limited assets in a non cash environment so his growth potential is limited
On Tanya’s death he is eligible to claim for APS to retain Tanya ISA limits however will be part of his estate
His property and equity holdings have growth potential
His IHT liability may increase later on
Hi life cover is already in trust so would not pay into his estate on death
During the term of his life cover, there is sufficient value to pay current IHT bill
His life cover will end in 11 years time
As he is still young can take out life assurance for potential IHT mitigation - may be affordable
We don’t know who Alex has as trustees of his current discretionary trust or who he would appoint if he were to set up further trusts for the children
Alex’s current will and LPA will need updating following Tanya’s death
Alex wants to look at options that can help to mitigate his new IHT issue but is unsure how much he will need to maintain his and the children’s lifestyle as they adjust to life without Tanya.
(a) Explain a ‘discounted gift trust’ to Alex, and comment on the benefits and drawbacks of him using this to mitigate his potential IHT liability.
A DGT is set up as a gift made into a trust - which is then invested in to a investment bond
Alex states what income he wishes to be paid to him from the trust
He is underwritten to calculate the amount of the gift that is needed to produce the required level of income
The bond value, after allowable annual exemptions is notionally split into two
The amount required to produce the income stream is discounted from the gift - immediately removed from estate value
The discount is based on his age, health and level of annual income set up to be paid out
The level of income is fixed, usually set within the 5% of the amount invested in order to stay within the 5% deferred tax withdrawal limits
The balance of the gift over the discount will be a CLT if a discretionary trust is used
This balance will be outside of Alex’s estate after 7 years
Any growth on the inv bond will be within the trust and also outside of the estate from outset
** Benefits and drawbacks **
Benefits
Immediate IHT reduction on estate on value of discount
Alex is young and in good health, the discount could be substantial
Any growth in investment bond value outside the estate
Will provide a regular income/ help maintain lifestyle
Can retain control if a trustee
Children can eventually inherit the residual bond value
Bond produce less admin and are less time consuming for trustees - not income producing
If income kept below 5% not a chargeable event
He can use DGT for guaranteed income for 20 years while mitigating IHT
The children are likely to be financial independent within this period
Drawbacks
a DGT is inflexible as levels of withdrawals set at start
Likely childcare costs will finish in the next 9 years but income will continue
There is a loss of access to the capital as only the agreed income is available
There are underwriting requirements to set up the plan
With a Discretionary trust, periodic and exit charges may apply
If Alex dies within 7 years the value of the CLT will fall back into the estate and will be assessed against the nil rate band
Alex wants to look at options that can help to mitigate his new IHT issue but is unsure how much he will need to maintain his and the children’s lifestyle as they adjust to life without Tanya.
(b) Outline how a loan trust could be used to provide money to help with his childcare costs on an ad hoc basis.
Can place money into loan trust and put the children as potential beneficiaries
He has control as a trustee of how he distributes the funds
Any growth on the investments within the loan trust would be outside his estate
As a trustee he can make distributions of this growth to the children at any time
It helps to ear mark funds for the children’s needs, but avoid this growing within the estate, which would compound his IHT issue
When taking withdrawals he can request as much or little of the original loan back from the trust to meet requirements as they occur
This may be a better fit with changing needs as the children get older
The transfer out of his estate of the initial capital would only happen when he actually spent the money
He could set up loan repayments from the investment bond using the 5% of original capital rules to provide income in a tax efficient manner whilst he is still working
This would postpone chargeable events until closer to retirement when he may have had a change in taxpayer status from his current higher rate status
If he takes less than 5% cumulatively he can extend this period
Recommend and justify a range of actions that Alex could take now and in the future to help ensure that his estate is passed to his children in an inheritance tax (IHT) efficient manner.
Transfer part of his inv holdings to a DGT
Transfer part of his cash or UT holding to a discretionary trust
Make use of annual exemptions - £3k py - carried forward 1yr
Make like time transfers to children - fall out of estate 7 years
Make regular transfer to children from disposable income to either the children or a life policy
Spend money from investments and cash rather than Tanya’s pension
Allocate further funds to pension plans
Ensure pension nomination forms, wills, trusts, LPA’s are updated and kept regularly updated
