Marlene Shalton, director of Cardiff-based adviser Chambers Morgan James, explains how she made inno...
Marlene Shalton, director of Cardiff-based adviser Chambers Morgan James, explains how she made innovative use of inheritance tax planning for one of her clients.
John Wogan is last in the line of a family of farmers. Aged 79, he had finally inherited his sister's estate and, some years previously, the estates of his two brothers. He still owns farm buildings and 35 acres of land, most of which is tenanted. Of his investments, £550,000 was in cash and £650,000 in equities and collectives.
Typically for farmers, while the family had an accountant, they had not taken any tax or financial planning advice over the years. Inheritance tax had always been paid on the estates and John was a higher-rate taxpayer.
None of the siblings, including John, had married or had children, and so the estate was likely to be left to 20 cousins on his death ' John's mother had been one of 12 children.
John was referred to me by a solicitor in charge of completing his will and was looking for advice on the net £250,000 his sister had left in cash.
On the face of things, it seemed a fairly straightforward case for investment advice and, judging by his age and portfolio, John would have happily invested in a fixed interest bond for a few years.
By doing so, he would not have to be concerned about the investment and it would all have been simple.
As inheritance tax had always been paid without question and the farm would receive agricultural relief, the solicitor assumed John was largely unconcerned about tax issues.
However, not one for taking matters for granted, I asked John a few pertinent, if rather obvious, questions like whether he was concerned about his beneficiaries having to pay tax and did he mind paying tax himself.
It transpired that he was certainly interested in any ways he could mitigate this burden. On further investigation it became clear John had no requirements for most of his investments, never mind the extra £250,000, for either capital growth or income.
Given his frugal existence, he could probably manage on his state pension.
The solution was to make use of a discounted gift scheme in conjunction with an offshore single-premium capital-redemption bond, written subject to a flexible power of appointment trust. John could invest the newly acquired funds and transfer other assets he held into the scheme so immediate savings could be made.
If he survives for a few more years, further savings are also possible.
The ability to take 5% withdrawals on the whole amount, even though it would be split into residual and settler's funds, would immediately reduce his income tax bill, for example.
Although John is unsure about his survival for another seven years, there will be some reduction in tax. Given that the gift is a potentially exempt transfer and the fact that medical conditions could reduce the discount, there are no guarantees about the sums likely to be saved. However, the alternative of making just another investment would only add to the inheritance and income tax bills.
Tip of the Week
Editor of the Tax Efficient Review, Martin Churchill, says most investors with no capital gains this tax year are throwing away up to £6,000. 'It is not widely recognised that ˜bed and breakfasting,' the selling and repurchasing of shares to crystallise a gain to offset against the annual capital gains tax exemption, is still possible for venture capital trust shares,' he says.
This is relevant to investors who:
• Deferred a gain by purchasing VCT shares
• Have held their VCT shares for the minimum period to ensure income tax relief is not withdrawn ' either three years of five years depending on the date of investment
• Have not utilised their £7,500 CGT allowance for this tax year
'An investor meeting these criteria can ˜bed and breakfast' £7,500 of shares, re-crystallise the gain of £7,500 deferred into the VCT and offset the gain against the annual exemption,' says Churchill. 'This saves CGT, at the top rate, of £3,000. If the spouse is in the same position of not using the annual CGT exemption, then the investor can gift £7,500 shares to them and bed and breakfast these shares, making a total saving of £6,000.'
The Tax Efficient Review website, www.taxefficientreview.com, contains more details on this. Investors can also use the site to check how much VCTs have raised in this tax year and register free to receive email notification when the VCTs of their choice pass the fund raising levels of 50%, 60%, 70%, 80% and 90%.
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