Case Study Four - Inheritance Tax
Situation
Geoffrey is a 59 year old principal dentist who has decided to retire on his 60th birthday this summer. He is looking forward to his retirement with his wife Judith, aged 55, who is a dentist working at the same practice. Judith intends to retire this summer as well when she will be nearing her 56th birthday.
They have three children all in their late 20’s and early 30’s, and their first grandchild is about to be born.
Once they have sold their practice, taken the proceeds of a few maturing policies, and banked their NHS Pension lump sums, approximately £550,000 will be available to augment the pensions they have also built up. Judith has also just inherited £155,000.
With no debt, the future looks rosy. Or does it?
Well yes, it does, but it also looks good for Gordon Brown! Their total estate with the house and other possessions and cash savings will total around £1.5 million. Without proper planning the inheritance tax bill could potentially be £486,000!
Geoffrey and Judith had previously looked at taking out a life policy to help with this problem but were put off by the worry that the premiums would keep on rising as they got older.
What We Did
We put forward the following recommendations, having satisfied ourselves that we truly understood their goals and requirements, which were (in their words):
“Ensuring we will always have enough for ourselves to enjoy an active retirement and to do as we wish, whilst doing our best to leave our estate to our children and not Gordon Brown.”
The recommendations:
- Change the Wills to make the most of nil rate band planning. This means that on death both Geoffrey and Judith will be able to claim their personal allowance of £285,000. Saving £114,000.
- Using forecasting software we worked out a gifting programme for this couple. This involved the immediate gifting to their children of £300,000, as well as £10,000 per annum. Immediate saving £120,000, and £4,000 per annum.
- The remaining £250,000 potential IHT bill was still a concern to them, and so they did take out a life policy based on a joint life second death basis. Because of their family history of long livers and their worry about the cost of such a policy going up in cost to unacceptable levels, we found a plan which guaranteed that the premium would not increase. Although more costly to begin with, this suited Geoffrey and Judith. Saving £250,000.
The Result
What this means is that Geoffrey and Judith have now totally solved their inheritance tax problem, passing their assets to their family rather than the government. It will also mean that their new grandchild will have their own nest egg for the future.
Note: the gifting discussed above involves potentially exempt transfers which require a seven year period for the donor to survive for the gift to be totally free of IHT.
