IHT

Question 1

7 points

Explain how you would work out Tom and Sally’s estate and IHT due

Answer 1

• Total all Tom and Sallys assets to arrive at gross total estate - Savings and investments and chattels = £1,315,000
• Exclude pensions and DIS as outside of the estate and mortgage will be paid by LTA
• Then deduct £325,000 NRB X 2
• Then deduct £175,000 NRB X 2 (as Amelia and Noah are direct decendents i.e children)
• To arrive at taxable estate £315,000
• 40% IHT £126,000

Question 2

IHT mitigation options

Answer 2

• Annual exemptions this year and last year £3,000 per year
• Gift out of normal expenditure
• Gift made outright
• Trusts
• Pension contributions
• Take out insurance e.g WOL etc

Question 3

Additional questions before you can advise on estate planning

Answer 3

NEED
* Do they want ESG or ethical investing for this need area or to exclude or include particular areas to meet their ESG or ethical requirements
GOT
Are Tom and Sally willing to transfer ownership of existing assets, either on death or now?
Do Tom and Sally plan to give any money to charity either now onr on death?
* Are Tom and Sally willing to make gifts out of income or capital?
* What is theier ATR and or CFL
FILL
* Has Tom and Sally made any gifts in the last 7 years
* Have Tom and Sally used any annual exemptions either this year or last year
* Do they know the amount that Tom’s mother is likely to leave as an inheritance?
* Would Tom’s mother be willing to leave any inhertances into Trust for the children, rather than Tom?
* Are they willing to amend their existing wills?
* Are they willing to pay any life cover cost to meet any IHT liability?

Question 4

Recommend and justify what client can do to mitigate IHT liability immediately

Answer 4

• Make gifts out of normal expenditure -Tom and Sally have a large surplus disposable income exceeding £3,000 a year this can be used to gift to the children and fund JISA
• which can be used to fund Amelia and Noahs university costs via JISA.
• Use £250 per donee small gifts exemption can be made each year, utlise this to fund Amelia and Noahs university cost via JISA
• Use annual exemption of £3,000 a year and can use last years exemption if unused, totalling up to £6,000.
• Make gifts to charity now and on death - will immediately reduce estate immediately
• If an inheritance has been recieved within two years of death a deed of variation could be effected, as long as all beneficiaries party to the variation agrees and will result in the gift never being in the estate.
• Gifts in to educational trust - Tom and Sally could transfer funds to fund Ameila and Noahs to help asiste with their university costs. Not treated as CLT so would be outside estate immediately not liabile to IHT.

Question 5

What options are available that take longer

Answer 5

• Tom and Sally can place existing assets into trust, would be treated as CLT and fall outside estate after 7 years, as long as PET doesnt fail within 7 years of death.
• Both Tom and Sally can create discretionary will trust on 1st death which will aovid any IHT on growth of asssets and give surviving spouse access to funds
• Insure against any resulting IHT liability with an appropriate whole of life plan, which will provide funds for the beneficiarires to pay the taxed bill, leaving more for them to inherit. Pay a tax free lump sum on second death when IHT will be due.
• Or insure through a gift intervivos plan that any PET’s or CLT’s that fail within 7 years of death, IHT is covered. Can be taken joint life second death. Pay a tax free lump sum on second death when IHT will be due.

Question 6

How would you recommend and justify life assurance policy

Answer 6

• Joint life, second death, whole of life policy
• To pay tax free lump sum on second death
• when the IHT will be due
• Initial sum assured to match the calculated IHT liability
• To match the IHT liabiltiy due on death
• Indexation of benefit
• As there will be an increasing liability as the estate grows in value over time
• Waiver of premium
• To ensure the premiums are paid in event of either Tom or Sally having an accident or long term sickness and enables the cover to continue
• If there is an investment content then fund choice matches ATR - Matches client ATR and investment preferences
• Put into Trust for Amelia and Noah - So that the proceeds are outside Tom and Sally’s estate and can be paid immediatly without having to wait for probate and ensures the liability is met and gross estate is recieved
• ## Premiums will be treated as being part of the estate - but can use annual exemption to avoid this

Question 7

** Detail and justify the **recommendations you could make to Tom and Sally now in respect of **reducing their Inheritance tax liability **so as to help ensure their estate can ultimately pass to their children in a tax-efficient manner.

Answer 7

• Tom and Sally can gift £3000 a year annual exemption each and use last years 2 X unused £3000 annuall exemption into 2 X JISA for Amelia and Noah - This would immediatlely remove £12,000 out of their estate and not be liable to IHT
• Tom and Sally can both increase their pension contributions and take advantage of unused annual allowance of up to£60,000 -
• Tom an Sally can also carry forward any unused allowance from the last three years to increase their pension contributions.
  The contributions and the tax relief will grow in a tax free environment and would be outside of their estate for the purposes of IHT-
  Noah and Amelia can be nominated as beneficiaries and can inherit their pensions if either of them were to die with liability to IHT
• Tom and Sally can each use the small gifts annual exemption of £250 and gift into Amelias ISA and Noah ISA -
  This will remove 2 x £250 to Amelia 2 X to Noah totallying £1,000 form their estate immediately
• Tom and Sally can gift from suplus income as they have in excess of £3,000 a month in surplus income to Ameila and Noah
  they meet the rules as amde from income, can pay regularly and it does not affect their standard of living as out of disposable income. This would immediately exempt and outside their estate for IHT purpoes
• Tom can assign the investment bond into a Education Trust for the children and this would be immediatley outside of his estate for IHT purposes -
• They can contribute into a pension for Amelia and Noah of up to £2880
  the children will recieve tax relife of 20% whcih can grow in tax free environment and be used by the children when they retire and removing this from Tom and Sally’s estate
• Their joint first death level term policy should be put into trust
• This will remvoe the proceeds from the estate and paid directly to the executors of the estate to pay off the mortgage and the home be left to the children
• Sally can nominate Tom ad the children on her deferred pension nomination form
• Tom and Sally should nominate the children on their pension nomimation forms for their existing workplace pension -
  ensures Trustees know to pay the chidren in event of both Sally and Tom dying and ensure the pension assets remain outside of their estate.
• Tom and Sally can consider EIS/SEIS & AIM investment into busines relief qualifying investments will qualify for IHT exemption after 2 years
• Tom and Sally can make outright gifts/PETs/CLT within the NIl rate band
  reduce the estate after 7 years
• Affect a WOL policy to pay IHT liability on 2nd death and put into trust for the benefit of Amelia and Noah
  Premiums classed out as out of normal edxpendtiure or out of annual gift allowance
  should include indexation option as estate value could rise over time
• Make minimal withdrawals or no withdrawal from pension when initially retiring and source income from non pension assets
  help retain pension value outside of estate for IHTpurposes and taxable assets used first

Question 8

Identify 5 keydrawbacks of Tom and Sally effecting a whole of life policy to protecting their IHT liability

Answer 8

• Tom and Sally are relatively young and are in good health with no family history of health issues. The could live for a long time and so over the long term the premiums could in total be quite expensive and ocver may be insufficient
• The value of Tom and Sally’s estate may grow over time any indexation in place as part of the policy may not cover the entire IHT liability
• Tax rates may change
• Their estate may decrease in value and end up being over insured or NRB may be increased
• IHT liability still payable
• The premiums will be reviewable as Tom and Sally get older and become more expensive

Question 9

Tom and Sally have a significant IHT liability on second death. They are considering the options of making lifetime gifts to their children to reduce the liability or alternatively setting up a joint life second death whole of life policy in trust to the executors to cover the liability

Outline four potential benefits and two potential drawbacks of taking out a
whole of life policy to cover the IHT liability

Answer 9

Benefits
* A tax free lump sum would be paid out on second death to meet Tom or Sallys estate lHT liability immediately
* Assets within the estate would not need to be sold off
* Allow couple assess to their assets during their lifetime
* They could put the policy in trust so that it would also be outside of their estate and paid out without probate, allowing the children to access their inheritance, maximisese value to estate left to children
* The premiums would usually be added to the estate but they could use their £3,000 annual exemptions for htis
* The benefit can be indexed link to take accound to account of increases to thier estate

Drawvbacks
* There is still a liability to pay, it doesnt reduce Tom and Sallys Estate
* The cover maybe insufficient to cover the IHT bill as Tom and Sally are realtively young and healthy and so their estate can grow in excess of the cover
* Increase expenditure and can be expensive.

Question 10

Tom and Sally have a significant IHT liability on second death. They are considering the options of making lifetime gifts to their children to reduce the liability or alternatively setting up a joint life second death whole of life policy in trust to the executors to cover the liability

Outline three potential benefits and three potential drawbacks of making
lifetime gifts to reduce the IHT liability

Answer 10

Benefit
* Tom and Sally get to see the Amelia and Noah enjoy the lifetime gifts made to them and theres no cost involved the children will benefit immediatly
* It reduces their estate immediatley if they were to use exemptions such as £3000 per year or gift out of normal exependiture
* Not assessable for IHT if Tom and Sally dies within 7 years
* They wouldnt have to pay 40% on tax on which their estate is reduced by

Drawback
* Lose access to capital or money that you could be used for thier other needs and objectives
* The children are currently to young to recieve the life time gifts and so would need to be put into trust or JISA for when they are older
* If they were to die within 7 years the gift would be assessible and potential IHT to pay if in excess of their estate
* Loss of control if given to children the money might not be used for intended purpose.

Question 11

7 points

Explain in detail to Tom how investing in Alternative Investment Market (AIM) ISAs could help him to mitigate any future Inheritance Tax liability

Answer 11

• Shares in AIM companies qualify for Business Relief
• If held for two year or more
• Tom would get 100% business relief saves 40% IHT
• IHT does not apply to qualifying Business relief assets
• Assets must be held on death
• ISA an be transferred to Sally on death using APS
• Holding period would transfer to Sally and IHT tax efficiency retained

Question 12

Explain, in detail, to Tom any IHT implications of the gift of the onshore bond he recently reccieved form his morther

Answer 12

• Tom mother also gave equivalent gift to his two siblings of £160,000
• The gift are treated as PET, so no immediate tax payable
• If Tom’s mother dies within the next 7 years the gifts would be added back to her estatate
• In total Tom’s mother has gifted £480,000
• This exceeds her NRB of £325,000
• £3,000 annual exemption from the year she died and the year before can be used to reduce the amount liable to IHT
• value subject to IHT is £480,000 - £6,000 - £325,000 = £149,000
• As she made the gift to both Tom and his siblings at the same time the beneficiaries are all liable for a third of the tax charge
• 40% IHT would be payable on £149,000 = £59600 and Tom’s share would be £19,866
• If Tom’s mother was to survive at least three years since the date of giftts, then taper relief can be applied
• Ton can protect this risk via a gift intervivos plan over 7 years, sum assured £19,866, life assured his mother and in trust with Tom as the beneficiary.