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Financial planning case study: Hold over the IHT liability

Estate planning and referring specialist needs to a solicitor will pay off for a couple

The problem. A retired couple want to put some estate planning in place with a strategy to mitigate a potential inheritance tax liability for their daughters. They have amassed a considerable investment portfolio in addition to other savings and pension assets and wish to examine ways to begin to pass some of their wealth to their two daughters without triggering a tax charge.

Issues to look out for:

  • Inheritance tax liabilities for their beneficiaries
  • Capital gains liabilities both for themselves or their daughters if assets are gifted
  • The potential to use gifts holdover relief to mitigate IHT liability

The solution:
Mr and Mrs F are retired and are comfortably well off. Their estate is worth £3.2m, with a particularly large shareholding in one company, built up as a result of many years’ successful employment. They want to engage in estate planning without selling these shares, which hold considerable sentimental value to them.

Their estate is worth around £3.2m, broken down as follows:
House £800,000
Cash £400,000
Investments £800,000
ABC plc shares £1,200,000

As part of their estate planning, we discussed how to reduce the value of their estate by gifting shares to their children – they did not want to sell the shares nor were they comfortable about simply gifting the shares as this would give rise to an immediate capital gains tax liability.

A simple solution was found which involved the services of a local solicitor that we referred to them.

The answer lay in establishing two discretionary trusts (one for each daughter) with £275,000 worth of ABC plc shares were placed in each of the trusts.

With the assistance of the solicitor, my clients used holdover relief to transfer the underlying gain into the trust and avoided an immediate taxable liability.

It is Mr and Mrs F’s intention to pay the dividend income from the trust each year to each daughter and maintain the trusts until Mr and Mrs F are both deceased, thereafter each daughter can break their trust and receive the shares directly.

As this constitutes a sale for CGT purposes, each daughter can choose to pay the tax when it becomes due or use holdover relief to carry the gain across.

If additional income is needed by either daughter, with her parent’s permission, sufficient shares could be sold by the trust each year to use up the trust CGT allowance (half the individual rate of £10,600 would be £5,300 for 2012-13).

This solution also gives several other benefits. Gifting the shares to a discretionary trust is a chargeable lifetime transfer , so, under the seven- year rule, no further IHT liability is incurred if the settlers survive for a further seven years. In keeping with Mr and Mrs F’s wishes, the shares have not been sold. Mr and Mrs F are trustees and control the shares within the trust. Holdover relief can be used both into and out of the trust to defer the CGT liability.

In addition, the adviser recommending this solution gets to refer a case to a solicitor, which is an aide to building professional reciprocity.

However, there are additional measures to consider when looking at this advice, including the cost of establishing and maintaining a discretionary trust, other chargeable lifetime transfers made by Mr and Mrs F and whether they are planning on making potentially exempt transfer at the same time as the CLT. In addition, other trusts made by Mr and Mrs F have to be taken into consideration as does the 10-year period charges for CLTs on amounts in excess of the nil-rate band.

Jason Lurie is a chartered financial planner and partner at Holland Hahn & Wills

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