Case Study: Tony and Diane’s Story
How Tony and Diane secured an Inheritance-Tax-free legacy for their daughter and planned a secure retirement for themselves.
Tony and Diane are a married couple in their sixties, with a daughter who is living at home after university and is working full time. After a long and successful career of his own, Tony was about to join Diane in retirement, and they were both thinking hard about the future.
Tony and Diane’s estate
Over the years, Tony and Diane had created a healthy buy-to-let portfolio of residential properties. Between their comfortable family home and their buy-to-let properties, they enjoyed equity of over £1,000,000.
In addition, they had built up savings and shares of £440,000, and held a total of £470,000 in their pension funds.
They had made Traditional Mirror Wills in the past, leaving everything to each other on the first of their deaths, and to their daughter once they had both passed away. Their Wills were out of date, and their overall Estate Plan was no longer fit for its intended purpose. They had made no plans to safeguard themselves against the consequences of mental incapacity, and their estate plan in its present form was exposing them to an Inheritance Tax liability of up to £325,000.
Tony and Di wanted to ensure financial security for each other for the rest of their lives, whichever of them might pass away first.
They were also keen to achieve the maximum potential inheritance for their daughter.
They wanted to reduce, or hopefully eliminate, the impact of Inheritance Tax on their daughter’s inheritance.
They were conscious that their daughter’s inheritance would one day make her a very well-off woman, and that this might make her vulnerable to exploitation if she married an unscrupulous spouse. They were anxious to protect her from this risk.
Having managed their financial affairs skillfully throughout their married lives, they wanted to make sure that control of their finances remained firmly within their family, even if they lost mental capacity due to ill-health in later life.
They also wanted the same level of control to extend to any major personal decisions about their care and welfare in later life, should one or both of them become disabled in the future.
Solving their inheritance Tax problem
Tony and Diane decided to gift three of their buy to let properties to their daughter, to reduce the size of their estate, and thereby reduce their Inheritance Tax liability.
However, they didn’t want to expose those properties to potential rights that might be acquired by a son-in-law if their daughter should marry in the future. So, instead of a transfer into their daughter’s absolute ownership, they transferred the properties into a Family Trust. This was done by executing a Family Trust Deed, with Di and Tony as Trustees, and their daughter and any grandchildren and subsequent generations as beneficiaries.
To make sure the properties were well outside their estate for Inheritance Tax purposes, they made sure to divest themselves of any entitlement to the properties, or the rents generated from them. As Trustees, they could continue to manage the properties and make sure they were properly looked after, but they retained no other entitlement whatsoever.
They were only able to create a Family Trust in respect of the properties because all three were mortgage-free. Had there been mortgages in place, the mortgage companies would probably have objected to the arrangement. Even if the mortgage companies had considered to the arrangement a liability for Stamp Duty could have arisen. So, the absence of mortgages was key to their decision to create the Family Trust.
They were also fortunate that the properties had not increased in value since they were purchased, otherwise they would have been liable for Capital Gains Tax.
However, transferring the three properties into the Family Trust wasn’t enough to eliminate the Inheritance Tax liability altogether, so they worked with their financial advisor to reinvest their savings in vehicles exempt from Inheritance Tax, including Enterprise Investment Schemes and bonds.
This left them with an Inheritance-Tax-liable estate consisting of their home plus £600,000, which they could leave to each other and their daughter in their Wills without incurring Inheritance Tax.
Updating their Wills
When updating their Wills, they opted to upgrade from Traditional Mirror Wills to much more robust Family Trust Wills.
First, they left their respective halves of their family home to their daughter absolutely, but made sure that their daughter wouldn’t receive this absolute gift until they had both died. For the interval between the first and second of their deaths, they included provisions to ensure that the survivor of them would be able to carry on living at the family home undisturbed. They did this by including a Right of Occupation of the family home for each other.
This triggered the new Residence Nil Rate Band, which was introduced on 5th April 2017. The Residence Nil Rate Band gave them an extra allowance for Inheritance Tax, starting at £200,000 between them and rising to £350,000 between them by April 2020.
The rest of their assets were left in a Family Trust for the benefit of each other, their daughter and subsequent generations of their family. This gave the survivor of them, then their daughter and subsequent generations, the benefit and use of the legacy they were leaving behind, whilst protecting that legacy from anyone outside their immediate bloodline.
Their daughter’s inheritance, having been placed within a Family Trust, was divorce-proof, and could also be passed down to her own children at the end of her life without incurring any further Inheritance Tax.
Planning forward in case of Incapacity
To retain control of their financial affairs within their close family circle if either of them were to lose mental capacity, they made Lasting Powers of Attorney for Property and Financial Affairs, appointing each other their daughter as Attorneys who could intervene on their behalf in the event of incapacity.
To reserve important decision-making powers about their care and welfare in later life or in case of illness, they made Lasting Powers of Attorney for Health and Welfare. Again, they appointed each other and their daughter as Attorneys. This reduced the risk of future interference from outside professionals, like social workers and doctors, to a minimum.
Their Lasting Powers of Attorney for Health and Welfare were reinforced by Living Wills, specifying that, if they were ever unable to communicate their wishes to medical professionals, their comfort and dignity would always be the main priority.
By investing just over £3000, they eliminated a potential £325,000 tax lability, secured their estate for each other and their daughter, and retained an iron control on both their financial affairs and important personal decisions about their health and welfare in later life.
Tony and Di’s estate was larger and more complex than average, which justified investing in a robust set of measures. However, the level of protection, and the budget, can be adjusted down to suit smaller estates and more most budgets. It’s a matter of deciding on an approach that’s proportionate, not only to the assets that require protection, but also to the budget in mind.
Every family is unique, so for help with identifying what protective measures are right for your family and your assets, just get in touch, for complimentary in-depth personal consultation followed by clear written advice on which to base your decisions.
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