Ask the expert: “What estate planning options are still available to me?”
An 89-year old turned to us for advice on reducing his inheritance tax liability.
Five years ago, Robert approached us for advice on how to reduce the potential inheritance tax liability on his estate. Robert was in his 80s and lived comfortably, following a successful career as a lawyer and a generous defined benefit pension. He had neglected to consider estate planning until now. Ideally, inheritance tax planning is done in stages over a period of time. Nevertheless, Robert was very pleasantly surprised to discover that there were still options available to him.
Sadly, Robert died last year. Our planning work enabled his estate to save £120,000 of inheritance tax.
The most straightforward way of minimising inheritance tax is to give funds away. However, Robert would have had to live for seven years to make sure that gifts were completely outside of his estate (find out more here). Given his age, he felt he could not count on this.
Robert had recently sold his home and moved into a care home. Care home fees and living expenses were covered by his pension and income from lower-risk investments. We advised him that he could set aside £300,000 for higher-risk investments that qualify for Business Relief – and which would also allow him to reduce his inheritance tax liability.
Business Relief (formerly known as Business Property Relief) investments can be passed on free of inheritance tax providing they have been held for a minimum of two years at the time of the investor’s death. This two year timeframe felt much more appropriate to Robert than the seven years required for gifts. Business Relief is a well-established relief and has been available for over 40 years.
Qualifying investments include unquoted companies and companies listed on London’s Alternative Investment Market (AIM) that meet certain criteria. Robert invested through three Business Relief investment specialists, including Cazenove Capital’s Inheritance Tax Portfolio Service.
Importantly, if an investor needs access to the funds in their lifetime, the shares can be sold and cash returned. This would mean surrendering the Business Relief benefit, but it does mean investors still have access to liquidity if they need it.
When Robert died, the Business Relief investments had been held for the two-year minimum holding period and were therefore outside of his estate for the purposes of calculating inheritance tax. These investments did not use up Robert’s “Nil Rate Band” (NRB). The value of an estate above this level – which is currently set at £325,000 – is subject to inheritance tax.
Once probate was granted, Robert’s daughter inherited the Business Relief investments. She subsequently sold them, given that they had fulfilled their purpose and were not suitable investments for her.
By following our strategy, Robert managed to remove £300,000 from his estate and shield it from a £120,000 inheritance tax bill.
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This communication is for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Statements concerning taxation are based on our understanding of the taxation law in force at the time of publication. The levels and bases of, and relief from, taxation may change. You should obtain professional advice on taxation where appropriate before proceeding with any transaction or investment. Past performance is not a guide to future performance and may not be repeated. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. Your capital is at risk when investing.
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested.
This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements.
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