The Wire: Autumn 2020 – Case study – Working with a family to reduce IHT while creating a wonderful lifestyle

(Estimated read time 6 minutes)

Case study – Working with a family to reduce IHT while creating a wonderful lifestyle

Our client was recently widowed and held a large property in the home counties and had done so for over 50 years. The house was filled with fond memories, boasted wonderful grounds, and had been a safe haven over the years. However, despite being a large asset in her estate, maintenance costs were increasing.

The family were also conscious that this property, and hence the value of the overall estate, would attract a large Inheritance Tax bill on her death.

She had previously held a reasonable level of cashflow from pension and investments to fund her lifestyle. However, following the death of her husband, some of this cashflow was set to reduce due to a drop in annuity and pension income.  

There were also concerns that her cashflow needs would potentially increase if long-term care was needed or she required additional help whilst remaining at home. This was a concern to both her and her family.

The client was also keen, where possible, to financially assist her children.

Whilst she was hugely successful in her career, she was not confident with financial planning or managing her assets. Having recently been widowed, she was nervous given that her husband often dealt with major financial decisions. It was therefore important that she and her family felt comfortable with any changes to her lifestyle. 

What we did 

We worked with the family to build a lifetime cashflow (HFMC MoneyMap™). We made very conservative assumptions, such as:

  • Living longer
  • Needing more care at home and the associated cost for a long period of time
  • Low returns from investments
  • Additional cashflow over and above her budgeted needs.

Stress testing these scenarios showed the client in a simple, graphical way how, if she downsized her property, she could still live in a wonderful house with a garden, yet it was more manageable in terms of size.

It also showed how her cashflow needs could be funded across several scenarios, and that she could gift funds to her children. This both reduced the value of her estate for Inheritance Tax and helped her children financially at a time when they needed it most, while ensuring she would be comfortable in the long term.

We worked with her children as a means of discussing how a house move would work and how funds could be released from the property, gifted, and carefully invested as a means of reducing her estate for Inheritance Tax.

The graphical representations and descriptions without jargon helped her to understand the scenarios in a simple way. She agreed that it made sense to downsize her current home.  

Once she had sold her current home, we worked with a legal team so that the new property was purchased in trust for the benefit of her grandchildren with a long lease. The legal team drafted all the contracts and trust paperwork needed.  

Now, our client does not own the house as this is a new property that she rents. The rental income is paid by the client to the trust which, in turn, funds any maintenance costs of the house (such as gardening and upkeep). 

Any surplus income is held by the trust to be distributed to the grandchildren who, at the current stage of their lives, are nil or basic-rate income taxpayers, so it makes use of their allowances.  

Our HFMC MoneyMap™ showed the client how she could afford to continue to pay rent for this property from her increased cashflow from investments, some of which held in Inheritance Tax efficient structures, as a means of reducing her estate for Inheritance Tax. 

The beneficiaries of the trust are her grandchildren, and the trustees are her children. This ensures that the grandchildren cannot sell the house without approval or breaking the lease.  

The client pays rent to the trust which pays for overall maintenance of the house and any surplus rental income is then distributed to the grandchildren each year to assist their cashflow needs. 

The grandmother adores being able to send an annual cheque from the trust each year and the grandchildren are so grateful for the additional funds which boosts their income from their chosen careers. 

Following the sale of the property, she was also able to make a large gift to each of her children at a time when they could make meaningful use of the funds.  We also worked with one of her children to purchase the freehold of her short leasehold property and established a portfolio as a means of investing funds for her to provide her with additional cashflow, and regularly work with her to ensure that this is on track.

She is also receiving a regular cashflow from her investments of which approximately half are in trust and hence exempt from Inheritance Tax. 

Ongoing review

We regularly review the plan to ensure that her investments and plan is on track. Recently, at a regular review, we again reviewed the cash balances that she had accumulated (as due to the very conservative assumptions she was accumulating additional cashflow).

It was agreed that it made sense to gift each grandchild a further sum as she had accumulated the additional surplus cashflow mapped out in her plan and had yet to spend this on long-term care.

We reworked the plan to ensure there were still funds available to her on a long-term basis, again using conservative assumptions. This further gift will also reduce her estate for Inheritance Tax and will also be a means of helping each grandchild with a future property purchase. Giving with warm hands has also meant that client has seen the positive impact on multiple generations. 

End result

We went from a family which was rich in assets yet light on cashflow to a situation where multiple generations were assisted during the lifetime of a client, generating cashflow for several family members during her lifetime.  

She is thrilled to be able to see how the funds can benefit her children and grandchildren and, equally, the family are hugely grateful to receive the funds earlier so that they can benefit from this now.  

Tax savings

To date after five years of planning, gifting and careful investment, there is close to £4.8 million outside of the estate and £1.9 million of Inheritance Tax saved.  

By 2022, once a full seven years has elapsed from the majority of the gift and trust arrangements, this will rise to £9.3 million being outside of the estate for Inheritance Tax and close to £3.75 million in Inheritance Tax saved.

The client still has ample cashflow and assets to draw on, a wonderful lifestyle, very grateful family members and peace of mind that there is a plan in place which should will survive any bumps along the road.  

Please do talk to your HFMC adviser if you are keen to see some of these strategies could work for you and your family.

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