Robert is 58 years old and came to us for Financial Planning help for his 86 year-old mother, Margaret. His father Alfred died recently, leaving Margaret with a substantial estate to manage and his will to execute on behalf of his three grandsons.

Despite holding a highly paid job as a CEO of a FTSE 250 company, Robert was unsure how to best handle the various tax and investment challenges arising from the death of his father.

Margaret continued to live independently and is in good health. She has £36,000 of pension income each year which is sufficient to cover her current and anticipated expenditure needs. She would like to see Robert and his brother inherit her estate in equal shares.

Margaret had sought legal advice and was planning to gift her house to Robert and his brother, paying rent each month to ensure a genuine gift was made and further reduce her estate for inheritance tax purposes. This strategy relies on Margaret surviving for at least seven years after making the gift.

Estate planning remains an immediate priority as the inheritance tax bill if no action is taken will still be substantial. Another immediate concern is how best to invest the legacies from the will for the three grandchildren ages 10, 17 and 21.

What we did to help

Whenever a Financial Planning exercise involves multiple parties, it is vital to be clear with communication and involve

the right people in the decision making process. The main individuals involved in this exercise were Robert, who was executing the will on behalf of his late father, and Margaret, who was happy for Robert to make key decisions on her behalf.

Robert was in the process of applying for a Lasting Power of Attorney (LPA) for Margaret. She still had mental capability so at this stage the LPA was not registered. As mother and son are geographically distant, it was agreed that the attorneys would have the power to act severally as well as jointly.

The first step we completed was to undertake a thorough review of assets, liabilities, income and expenditure. With the main objectives of estate planning and investment involving three generations of the same family, it was important to gain a clear understanding of asset ownership. Robert had assets excluding property of £1.2m, held mainly in cash and a share portfolio. Margaret had assets, excluding her property which she planned to gift to her two sons, of £2m. This was also made up of cash savings and a large share portfolio. Margaret inherited around £1m of these assets from her late husband on his death and the intention was to distribute part of this to her three grandchildren now, in line with Alfred’s wishes.

Our analysis of the level of investment risk Robert and Margaret were prepared to accept with their wealth revealed very different approaches for each. Robert was confirmed as a motivated investor who is comfortable with a “high risk, high gain” strategy to investing over the longer term. Margaret was a cautious investor where capital preservation was her highest priority, with a small but steady return acceptable.

We knew from his will that Alfred wanted his nil rate band to be invested in trust, with his three grandchildren as the beneficiaries. This meant that the nil rate band of £325,000 was available for investment. These assets were available as cash. The grandchildren were entitled to this money when they reach the age of 21, so £108,333 was immediately distributed to the eldest grandson who had already attained this age. The balance of £216,666 needed to be invested for the two younger grandchildren. The older of the two will celebrate his 18th birthday later this year, resulting in a fairly short investment period. He explained that he would not want or need access to the entire sum on his 21st birthday, so the money could be invested for the longer term. The youngest grandchild has at least 11 years before he can access the money held in trust for him.

Based on the risk preferences of the trustees, we constructed a suitable asset allocation for each grandchild and populated these asset classes with funds from the recommended investment bond provider. An ongoing review schedule was agreed at outset and this would involve education for the beneficiaries as they got closer to age 21.After explaining the variety of savings and investment options available for the trust assets, we recommended the use of investment bonds. These offer the trustees simplified administration and were deemed to be non-income producing for tax purposes within the trust. There was also no capital gains tax liability for the settlor or trustees, as well as scope for tax deferment in the future.

With the instructions within Alfred’s will executed, we were able to then focus on Margaret and her estate planning challenges. The first step was to quantify the scale of any inheritance tax charge on her death in the future. All parties were aware this tax charge would be significant but had not until now been able to determine how much it would be.

Our calculations demonstrated an IHT charge of £847,000 on her estate of £2.4m. This liability would be lower assuming Margaret survived a full seven years after making the Potentially Exempt Transfer (PET) of a gift to her two sons. As this gift would constitute the entire value of her IHT nil-rate band, we suggested considering any Chargeable Lifetime Transfers were made from Margaret’s estate before she made the PET of the gift of the house.

At the same time we explained to Margaret the various IHT exemptions she could utilise, including the annual allowance of £3,000 a year and small gifts of £250 a year to individuals, which she had already been utilising by gifting money to her grandchildren. The option of normal expenditure out of income would be unavailable as Margaret would be paying rent for the property, increasing her expenditure to the level of her pension income.

After discussing all of the options, we agreed that Margaret should make a Chargeable Lifetime Transfer into a trust, up to the value of the nil rate band. This could remove £325,000 of value from her estate immediately, with the value of the gifted property also removed if she survived for seven years after making this Potentially Exempt Transfer.

Our lifetime cashflow forecast for Margaret revealed that disposable income would be quite tight after gifting the property and starting to pay rent at the market rate. Once the distributions to the grandchildren and disposal of cash assets to the trust had been made, Margaret would still have substantial capital assets which had the potential of generating income.

We had initially believed that a Discounted Gift Trust would not generate a sufficient level of discount due to her age.

At the meeting we confirmed her excellent health for an 86 year-old and discovered that Margaret was prepared to undergo a medical examination in order to confirm an appropriate level of discount, reducing the likelihood of any HMRC challenge in this area in the future. Based on her age and good health, we expected to secure a discount of £95,000 on an investment of £325,000, with the value of the Chargeable Lifetime Transfer at £230,000 which is well within the nil rate band and would therefore not result in a 20 per cent lifetime IHT charge. This option was preferred by the client to gifting the money in full into a Discretionary Trust, with ‘income’ withdrawals of £1,350 per month from the Discounted Gift Trust to supplement Margaret’s disposable income. The discount provided an immediate reduction in Inheritance Tax Liability and helped preserve more of the nil rate band on death.

What happened next

Following a meeting to present our findings and recommendations, we wrote to Robert and Margaret with a summary of the action plan and confirmed our answers to each of the questions they raised during the meeting. They were very happy with our understanding of their objectives and proposed solutions so they immediately proceeded with the implementation of our proposed plan.

We created investment bonds for the two younger grandchildren, using a wrap platform to manage the underlying investments we had recommended and ensure we could access these at the lowest possible cost for the children. We also began the underwriting process for the Discounted Gift Trust for Margaret, arranging for her to see a local GP to undergo the medical examination which would be used to secure the discount factor.

Once completed, we reduced the likely IHT bill from £847,000 to £587,000, which was considered a ‘good result’ by both Robert and Margaret.

We are keeping Robert and Margaret informed throughout the process and as soon as it is finished Margaret will be able to execute the gift of the property to her two children. An interim progress meeting was scheduled for three months’ time, to update both Robert and Margaret on the completion of the investments and to show them how to access their portfolios online.