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Mitigating circumstances

I am a widow aged 76 and am in good health. However, I would appreciate advice on arranging my financial affairs to cover the cost of long-term care if it becomes necessary and to minimise the inheritance tax payable on my estate.

After she had attended my inheritance tax planning seminar, I made an appointment with Mrs G, a widowed lady, who was aged 76 and in very good health. She provided a typewritten statement of her current situation and financial objectives.

Her income was £12,770 and her assets comprised her property, worth £500,000, chattels of £35,000, investments of £112,000 and £40,000 on deposit. She also had sufficient funds in savings accounts to cover her emergency or contingency needs.

Her financial objectives were to keep control of her money, to have sufficient funds to cover nursing home care if required and to minimise inheritance tax.

Having no children of her own, Mrs G&#39s will allowed for provision for her various nephews and nieces and their issue. She had made a sizeable potentially-exempt transfer some five years previously, which she had covered by effecting an inter vivos term insurance policy.

She was quite happy to take out further life cover to ensure that the IHT liability could be settled on her death without recourse to sale of assets. Selling assets would pose a problem, as the terms of the will and the asset split to the various beneficiaries left one beneficiary who was to inherit the house exclusively.

Due to the value of the property, any IHT mitigation needed to focus strongly on the suitability of the investments held. As these had been held for some time, they were in need of a review and it was established that, if they were to be sold, there would be no costs or penalties involved.

From the current investment portfolio, investments comprising unit trusts, investment trusts and life insurance bonds to the value of £57,000 were sold. This left the balance of investments in Peps and Isas intact. An independent capital gains tax calculation confirmed that there would be no CGT liability on the sale of the investments. These proceeds were added to the £40,000 on deposit that Mrs G had already earmarked for investment.

The advice hinged around providing long-term care cover and IHT mitigation. The following recommendations were submitted to Mrs G.

The first suggestion was an investment of £60,000 in the Sun Life International estate planning bond which would provide an annual income of £3,000, escalating at 5 per cent a year. The bond was written in trust for Mrs G&#39s beneficiaries.

The benefits of this were a freezing of the amount invested and an immediate discount of 62.3 per cent of the amount invested for IHT purposes. Thus, the liability remaining was a potentially-exempt transfer of £22,602, which would become fully exempt after seven years from the date of the investment.

Second, having investigated different types of long-term care products, it was decided to invest in the Scottish Amicable European long-term care bond. An investment of £37,000 would provide cover of £7,000 a year, escalating at 4 per cent. The capital growth option was chosen to allow further IHT benefits. As income was not needed from this investment, the bond was written in trust for Mrs G&#39s beneficiaries. The benefits of this were, again, a freezing of the amount invested for IHT purposes and it being classed as a potentially-exempt transfer,which would become fully exempt after seven years from the date of the investment.

Finally, a whole-life insurance policy for £100,000 was effected and written in trust, together with an inter vivos term insurance policy also written in trust, to cover the potentially-exempt transfers.

From an initial situation of having an IHT liability of around £170,000, the recommendations resulted in a substantially reduced liability of £30,000. Mrs G was happy that this liability could be comfortably funded from liquid investments on her death.

Should the need for long-term care ever arise, the arrangements would provide an escalating income of around £23,000 to cover it. Should long-term care not be needed, the investment proceeds would pass to her beneficiaries free of IHT, as would the proceeds from the estate planning bond, subject to her survival for seven years.

Mrs G was delighted with the recommendations, knowing that she had catered for any future possibility of requiring long-term care and had effectively mitigated her IHT liability to a level that could be covered by her liquid investments. Once this had been discussed with both herself and her main beneficiary and executor, we went ahead exactly as recommended.


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