Case study: Inheritance without the tax

Keith Mackie CFP™ Chartered MCSI, director at Acumen Financial Planning, helps a widow consolidate her late husband’s investments, gift money to her family and remove some of her future estate from inheritance tax

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The brief

Keith Mackie CFP™ Chartered MCSI

Keith is a director of Acumen Financial Planning, one of the leading independent firms in Scotland. He joined Acumen Financial Planning in 2004 and was appointed a director in 2014. He oversees the planner teams in Aberdeen and Elgin while continuing to serve his own clients.

The multi award winning firm has been awarded the CISI Accredited Firm of the Year in 2016 and 2018. Acumen has been established for 18 years with a team of 50 serving 1,500 client households across the UK with funds under management of £550m.

James approached me a year after his father, Dean, had passed away. It turned out that Dean had been quite a keen dabbler in the stock market, and had amassed over £1m in various company stocks, ISAs, and bonds.

Bella, James’s mother and Dean’s widow, could not be less interested in stocks and shares if she tried, so she was keen to hand these over to someone else’s management. James was helping her to log all the accounts, but his own experience and knowledge was also limited.

He came to Acumen looking for help in two primary areas:

  • To rationalise all the various accounts that Dean had been managing during his lifetime, into something his mother could understand, without being bothered by dozens of statements in the post, which was only adding to her stress.
  • To find out if something could be done to minimise the future inheritance tax (IHT) bill that could be due on his parents’ estate when Bella was no longer around.

The meeting

First, we met with Bella and James together, to hear from Bella what she was looking for and to establish if this was in line with what we could offer. Bella is a spritely 80-year-old, more than capable of making her own decisions. However, she does like James to accompany her to meetings and be a party to most discussions, though she makes it clear that she has the last word.

We established that inheritance tax was a key topic for the whole family. Bella confirmed that she was using her annual gifting exemption by giving money to James each year. She has two grandchildren, James’s son and daughter, who she would like to leave a legacy to, but they are both still young, so she doesn’t feel it’s appropriate to give them money outright at this stage. That said, she had promised a gift of £20,000 to her grandson on his 21st birthday, which was fast approaching.

We discussed Bella’s own immediate financial requirements, and it transpires that Bella is receiving a private pension income of around £3,000 per month from Dean’s employer, as well as her state pension – this is more than double what she actually needs every month for her own expenses. Hence, she has built up over £300,000 of cash savings in many different bank accounts.  

She now finds herself the owner of around eight different ISA accounts, and a direct shareholder in half a dozen different companies. One of these is Dean’s old employer, but Bella tells us that she doesn’t have any emotional attachment to any of the shares or accounts, and she is open to doing whatever is best.

£325,000 of cash has been removed from Bella’s estate via the DoV, saving a potential £130,000 of IHT

The plan

We create a Lifetime Financial Model for Bella, using Voyant software. Somewhat unsurprisingly, this shows that Bella is in a very comfortable financial position and is unlikely to run out of assets during her lifetime. We also use this to look at the outcomes of Bella gifting a larger chunk of assets into a discretionary trust. Bella and James like this idea as it starts the seven-year clock for inheritance tax but doesn’t put money straight into the hands of the young grandchildren just yet.

We also model for the possibility of Bella executing a deed of variation (DoV) of Dean’s Will, to give £325,000 to James.

All of this looks very plausible and at the end of the meeting Bella feels positive that we have a way forward to remove some of her future estate from inheritance tax, immediately and after seven years from now.

We also speak about Acumen’s investment approach and how we could apply this to a single ISA account for Bella, supporting her with managing this money going forward and minimising the amount of admin and paperwork she has to put up with.

First, we agree to do the deed of variation and pass £325,000 directly to James from his late father’s estate. This is executed swiftly by their family’s solicitors and a transfer is made from several of Bella’s existing bank accounts, which she is then able to close down.

Bella decides she would then like to start a family trust with a lump sum of £200,000. We employ a private client solicitor to draft a bespoke trust deed, with Bella writing her own detailed letter of wishes confirming that the trust is to be for the benefit of James, his children, and potential future generations of the family, and is to be used primarily for healthcare, education and property expenses.

We decide that Bella, James and the solicitor will be the trustees of the trust – we agree that this is sensible since James could also be a beneficiary, so having the third trustee would allow James to step back from any decisions where there could be a deemed conflict. Having the corporate trustee also gives Bella some consistency in the event of the death of the individual trustees. She also nominates a cancer charity as a backup beneficiary of last resort.

With input from the solicitor, we agree that the trust should be established first, before the potentially exempt transfer (PET) gift of £20k is given to Bella’s grandson for his 21st. A deed of gift is drafted to ensure that the grandson will not be asked to personally pay any IHT due if Bella does not survive long enough to exempt the PET from IHT, should the situation arise.

Bella later tops up the family trust with another £90k. We agree that, based on Bella’s surplus income, we should schedule a review every six months and Bella can at each point make a further contribution to the trust under the gift from regular income exemption.

What happened next

Bella is now a client with whom we speak on a regular basis. We have rationalised her ISAs into a single account with a single postal statement (Bella doesn’t do email), and an annual face-to-face review. She is very happy about this. We have the option of looking at business property relief products and alternative investment management ISAs in the future if we deem it appropriate.

£325,000 of cash has been removed from Bella’s estate via the DoV, saving a potential £130,000 of IHT. The trust has now grown to £338,000, and Bella has survived the first year of seven before the initial £290k is exempt from IHT as well, and continues to be in good health.

James has also now become a client of Acumen and we have helped him to invest a portion of his £325k inheritance towards his own retirement in around ten years’ time.

This article was originally published in the February 2021 flipbook edition of The Review

The full flipbook edition is now available online for all members. 


Published: 29 Mar 2021
  • Financial Planning
  • potentially exempt transfer
  • deed of variation
  • isa
  • inheritance tax
  • IHT
  • Pension
  • Case study

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