Case of the month – Inheritance Tax Planning and Family Provision for a Vulnerable Beneficiary
Introduction
Our client approached us, intending to understand their current exposure to Inheritance Tax (IHT) and explore strategies to preserve and pass on wealth in a tax-efficient manner to their adult child who is unable to work. Ensuring long-term financial provision for him was a central concern in their planning.
Their estate includes a mix of cash, pensions, ISAs, and property, both residential and investment. While both have UK domicile and residency, they also intend to purchase a property in UAE for seasonal use. Wills are in place but require updating, and they are seeking clarity on structuring their estate for maximum tax efficiency, particularly with their childs welfare in mind.
The Issue
Based on the current value of their estate, we calculated an IHT liability of approximately over £1 million, leaving only 67% of the estate available for distribution. Our clients wished to explore ways to reduce this liability, safeguard their childs financial future without impacting entitlement to benefits, and understand the implications of setting up a Family Investment Company (FIC) or trust.
Our Solution
We advised on several key strategies to reduce their IHT exposure, while preserving control and flexibility:
- Lifetime Gifts of Cash
The estate contains approximately £310,000 in liquid cash. We recommended making significant cash gifts now, as these qualify as Potentially Exempt Transfers (PETs). Provided they survive seven years from the date of gifting, these sums would fall outside their estates entirely. Taper relief would apply after three years for gifts exceeding the nil-rate band.
- Regular Gifts Out of Income
With a gross salary of over £100,000 and modest living costs, our client can make regular gifts from surplus income. Provided these are consistent and well-documented, they are exempt from IHT, regardless of value. This approach is particularly effective for long-term planning.
- Family Investment Company (FIC)
We explored the use of a FIC as a vehicle for holding investments, potentially funded via loans from surplus income or pension lump sums. A FIC allows the client to retain control through voting shares, while future growth can be attributed to a separate share class held by or for the benefit of their child. If the loan account is gifted, this becomes a PET, further reducing the estate’s value.
- Use of Trusts
Trusts offer a valuable alternative or complement to a FIC. Each client could contribute up to £325,000 without incurring an immediate IHT charge. Trusts may also be more appropriate for vulnerable beneficiaries, depending on benefit considerations and access controls.
- Will Planning and Property Structuring
We advised updating the wills to reflect current intentions, ensuring the main residence passes to their son. Holding the home as tenants in common and considering a co-occupation agreement may also support their goals. Plans to purchase a property in UAE should consider whether to hold it personally or via a company, given it remains within the UK IHT net due to domicile.
The Outcome
Through a combination of gifts, structural planning, and careful estate design, our clients could reduce their IHT liability from £1.078 million to approximately £388,000, a potential saving of £700,000. This ensures a greater portion of their estate (up to 80%) is passed on, with appropriate safeguards in place for their son’s financial future.
