John was 80 when he and his wife, Jane, came to see Gould Financial Planning for advice on reducing a potential Inheritance Tax Bill of £940,000.Jane was 15 years younger than her husband, and in good health. Their estate was worth a total of £3 million

Their Wills left the assets on first death to the surviving spouse and on second death to the children. Had they both died at that time, in 2008, the Inheritance Tax Bill would have cost their children £940,000.

Gould Financial Planning founding partner Simon Gould and his team were tasked with cutting this bill. They were able to make use of the twin government aims of helping small and medium sized businesses to grow and allowing husbands and wives to be taxed separately each with their own allowances.

We introduced John and Jane to a specialist solicitor – a member of the Society of Trust and Estates Practitioners (STEP) – who re-wrote their Wills and created a number of Trusts. We also introduced them to a stockbroker who specialised in investing in small and medium-sized UK companies.

Our strategy included:

• Arranging for each of them to retain their nil rate bands to Inheritance tax (£325,000 each).
• Arranging for a Terminable Life Interest Trust with the potential to save, by itself, £130,000.
• Arranging for the £1 million in cash and government bonds to be owned by Jane, with John holding the remaining £300,000.
• Replacing the UK equity shares (assets that would be subject to inheritance tax) with a portfolio of shares that qualified for Business Property Relief and we arranged for these to be held in John’s name. John’s Will would leave these ‘qualifying assets’ to a discretionary trust on his death (saving £400,000 in Inheritance tax as he had owned the share portfolio for over two years).

In 2011 John, sadly, died. Probate was granted later that year. The executors, as per the Will, directed his cash and bonds to the Terminable Life Interest Trust and they transferred the qualifying shares into the Discretionary Trust.
At that point:

• The trustees of the Terminable life interest trust appointed the trust assets to the children (Jane will need to survive to 2019 for the tax on this to disappear).
• The Trustees of the Discretionary Trust sold the shares and used the proceeds to build a portfolio of government bonds and cash

At the same time, Jane sold her government bonds and, together with her cash, bought the qualifying shares that the trust had just sold. Providing Jane survived for a minimum of two years following John’s death, then her estate, too, would on her death be able to benefit from Business Property Relief and save a further £400,000 IHT.

It is now 2014 and Jane is still in good health. If she had died earlier this year, the IHT would have reduced to just £140,000 – and this residual tax charge will itself totally disappear in 2019.

Postscript – Investing in small and medium size businesses carries more risk than investing in FTSE 100 shares. These stock markets are much more volatile. John and Jane were very fortunate – the portfolio of IHT ‘qualifying shares’ rose much more sharply during 2008 to 2011 than the mainstream equities. Whilst the inheritance tax saving was the basis for the recommendation, the family were delighted with the extra £200,000 increase that the replacement portfolio had achieved!