Legacy & Estate Planning – Mr & Mrs G. – October 2020

Total Tax Savings: £562,142 versus cost to formulate and implement recommendations of £6,500


  • Clients sold their second home for a substantial sum and through cash flow forecasting we identified an amount of £850,000 that they would never need to call on.
  • They wanted to set aside this money for their children and future descendants. 
  • They wanted to gift £200,000 outright over the next 2 years whilst retaining control over the remainder. 
  • The clients’ estates are equalised at circa (c.)  £2.4m each.


  • To begin to mitigate Inheritance Tax (IHT) with immediate effect.
  • To eliminate IHT on this £850,000 in time.
  • To retain control over £650,000 to determine who benefits from it.
  • To retain some level of access to the £650,000 ‘just in case’.
  • Growth focussed long term investment risk.

Current Position:

  • The clients have sufficient guaranteed pension income, other pension funds they can call on that fall outside their estate for IHT and investments, which means they can gift this £850,000 without affecting their standard of living.
  • Other than the standard annual exemptions the clients have made no other gifts to descendants in the last 7 years.
  • The standard Nil Rate Band (NRB), which is the amount of your estate that can be passed on free from IHT is £325,000 per person (£650,000) per couple.
  • On top of this we can each qualify for the Residence Nil Rate Band (RNRB) which allows a further £175,000 per person (£350,000 per couple) to pass IHT free when their home passes on death to their children or descendants.
  • The combination of the NRB & RNRB allows £1m to potentially transfer to their children free from IHT.

Key Issues:

  • When your estate exceeds £2m, the RNRB is reduced by £1 for every £2 of your estate value over the £2m threshold.  Therefore, for estates valued at over £2.35m (first death with one RNRB available) or £2.7m (second death with 2 RNRB available) an individual loses their RNRB entirely meaning they van only utilise their basic NRB.
  • If both clients died today, the IHT liability stands at c. £1.68m.
  • Clients wish to retain access to funds ‘just in case’.
  • Gifts into certain Trusts are regarded as Chargeable Lifetime Transfers (CLTs) and are liable to CLT tax if they, when added to other CLTs in the previous 7 years, exceed the current NRB of £325,000 per donor.
  • CLT tax at 20% is payable immediately on the excess over the NRB.  Therefore, total CLTs of £425,000 within the last 7 years including the amount placed into Trust would attract an immediate tax liability of £20,000.
  • As gifts into certain Trusts can potentially remain free from IHT for up to 125 years through your descendants, the Treasury has made the trust funds potentially liable to ‘Periodic & Exit Charges’ which can be eliminated or mitigated with careful structuring and planning.

Recommended solution for these clients:

  • Step 1 – Establish 4 Discretionary Family Trusts with a total value of £650,000:
    • Mr G 2020 Family Trust No. 1 – October 2020 – £162,500
    • Mr G 2020 Family Trust No 2 – November 2020 – £162,500
    • Mrs G 2020 Family Trust No. 1 – October 2020 – £162,500
    • Mrs G 2020 Family Trust No 2 – November 2020 – £162,500
    • Each Trust is invested through a single premium onshore Investment Bond wrapper to facilitate the rolling up of gains, interest and dividends within the wrapper rather than paying this to the Trustees – this avoids tax at the Trustees’ rate of up to 45%.
    • Tax is effectively deferred so that as the Trustees determine to pass benefits out of the Trust to a beneficiary, tax becomes due at the beneficiary’s rate which would usually be 0% or 20%.
  • Step 2 – Make the outright gifts or Potentially Exempt Transfers (PETs) of £100,000 each to the two children – December 2020.

Benefits of this structure:                                                                                                         

The order of gifting – Tax saved £40,000:

  • Making the outright gifts after establishing the Family Trusts means they would not reduce the NRB available to the Trusts if the PETs failed i.e. if the donor of the Trust died within 7 years of making the PET.

Periodic & Exit Charge – Tax savings depend on investment growth within the Family Trusts

  • Establishing 2 Trusts per person is likely to reduce the potential for Periodic Charge tax at year 10, reduce it on future Periodic Charge events and if any of the Trusts is wound up.

Inheritance Tax Savings – Tax saved based on assumptions given

  • The outright gifts made count as Potentially Exempt Transfers (PETs) and gradually mitigate IHT due to tapering relief, becoming fully outside their estates after 7 years saving £80,000 in IHT.
  • Any growth on the £650,000 investments into the Family Trusts is outside their estates from day 1 and free from IHT.
  • After 7 years, the initial gifts into the Family Trusts fall outside their estates and become free from IHT.  Assuming the underlying investments had grown at 4% per annum net of costs and charges over the 7 years, the value would be £855,356 representing a saving of IHT on these funds of £342,142.
  • Regaining the RNRB – for simplicity, assuming no growth on assets that remain in their estates over 7 years, their respective estates fall from £2.4m each to £1.975m based on the fact they have each gifted £425,000.  As the revised estate values fall below the threshold at which the RNRB reduces by £1 for every £2 of additional value there is a further potential IHT saving of £140,000 (combined RNRBs at 40%) depending on how will are structured and other possible gifting.
  • The way the Trusts and underlying investments are established enables the clients to assign small parts of the underling investments directly to their descendants so that they can be encashed when in their hands to eliminate or mitigate any tax on the gains.

The above case study is an example of what can be achieved with structured planning.

The tax position is based on the rates and allowances in the 2020/21 tax year.  Tax legislation changes and our advice could be different in subsequent years.