Julia was referred to Gould Financial Planning founding partner Simon Gould and his team by her solicitor in November 2001 following the death of her husband, Peter, in the previous April.Peter’s Will left his share of the couple’s main residence to a Discretionary Trust, along with approximately £27,000 in investments.
In August 2001 the property was sold and the Trust was holding £160,000 in the Trustee bank account.
Their two sons, Harry and Dylan, aged 22 and 20 respectively at the time, had no immediate need for such a large sum of capital. The Trust also gave Julia the reassurance that if she needed more capital for her own needs then she could benefit from it, but if she didn’t then the Trust capital was outside of her estate for inheritance tax purposes.
The Trust invested £160,000 into investments to generate returns above inflation over the medium term. Care had to be taken over the type of investment as Trust taxation was, and still is, punitive from an income tax and capital gains tax perspective. As income was not required the focus was on generating tax efficient capital growth.
Following the investment of the Trust monies at her first annual review in December 2002 Julia felt settled and confident enough to consider her own financial position. Her pension income was approximately £32,000 a year, after tax approximately £27,000. Now that she had moved to a relatively small flat her annual expenditure was estimated to be well within this.
Julia’s assets of approximately £410,000 were made up of her flat (£240,000), cash deposits (£140,000), and investments (£30,000). The inheritance tax liability on her death was calculated at approximately £67,000. Julia acted upon our advice and gifted £20,000 to each of her sons to clear debts built up while at university. She also gifted £100,000 to a Discretionary Trust. Unlike the Trust created on her husband’s death, Julia would be unable to benefit from this new Trust. These recommendations reduced the potential inheritance tax on Julia’s estate down to approximately £9,000 from December 2008.
In August 2008 Julia’s Aunt Iris died leaving her estate of £240,000 equally to Julia and her sister. Julia followed our advice and, with the agreement of her sister, Iris’ Will was varied by her solicitor leaving Julia’s share to a third Discretionary Trust. The reasoning behind this was that if the capital came to Julia and she subsequently died, her share of £120,000 would suffer 40% inheritance tax. She could, of course, have gifted the £120,000 to a Trust herself but this would still have led to inheritance tax in the event she died within seven years. By varying the Will, Julia could potentially benefit from the capital in the future without it forming part of her estate if she did not take capital from the Trust.
In April 2010 Harry was married and looking to buy his first property with his wife, Susan. The Trustees (Julia, Harry and Dylan) decided it was appropriate to distribute £75,000 from Julia’s Discretionary Trust to Harry. By careful planning, income tax of £5,000 was avoided by assigning part of the trustee investment to Harry prior to encashment. Following his brother’s wedding, Dylan proposed to his girlfriend Lizzy and the Trustees decided it was appropriate to wind up Julia’s Discretionary Trust by appointing the remaining £75,000 of the Trustee investments to Dylan; again this was completed via an assignment of the remaining Trust investment prior to encashment, avoiding £5,000 of income tax.
Gould Financial Planning founding partner Simon Gould said: “At our most recent review in December 2013, Julia identified approximately £7,000 per annum of surplus income and has started investments for her four grandchildren at £150 per month each.
“With our careful management, Julia’s estate is currently free of inheritance tax, her income needs of approximately £28,000 a year meets her expenditure of £21,000. If her expenditure needs increase she has the flexibility to stop the regular investments for her grandchildren. She has approximately £25,000 of personal savings and her flat is now valued in the region of £300,000. She has access to both Peter’s Discretionary Trust and Iris’ Discretionary Trust if required. These are now jointly valued at approximately £450,000.
“Harry and Daniel would inherit a sum in the region of £775,000 if Julia were to die today as no inheritance tax is due, and this is on top of the £20,000 they each received in December 2002 and the £75,000 they were both given in the summer of 2010.
“The result of this planning over more than a decade is that assets initially valued at £690,000 are now valued at £965,000 – including the distributions to Harry and Dylan totalling £190,000.
“No inheritance tax has been paid; the old adage that inheritance tax is a voluntary tax has been met for this family.”