The situation:
Mrs B sold her company for c.£3.5m after tax. As is common in these cases, she was tied in to carry on working within the business for a set period and will eventually receive another £4m.
She and her husband (both in their mid-50s) have three adult children, who were aged 23, 24 and 26 at the time of the sale. Mum and Dad have a family home and a flat in London, as well as a holiday property in the West Country. They had limited savings beyond this. The result was that should they die their estate would face a £2.4m IHT liability (and that is before the next tranche of cash comes in).
They wanted to reduce this IHT liability. The obvious solution was to give money to their children but how much, when, and how to do it without demotivating them?
The obvious solution was to give money to their children but how much, when, and how to do it without demotivating them?
The solution:
My colleagues advising Mum and Dad first calculated through a careful budget review how much they will need a year in income when they retire. A figure of £100k pa was agreed. This enabled us to work out how much to keep back for them and start to invest it sensibly.
Next, they looked at the children’s needs. Mum and Dad were keen to pay off their university debts and help them get on the property ladder. We had several discussions around the size of the gift and after careful analysis agreed that £900,000 in total was a sensible amount and would not undermine their own finances. We discussed the downsides of gifting too early against the positives of tax planning.
The easiest way to avoid IHT is through what is known as a “potentially exempt transfer” – this allows you to make gifts of unlimited value, which become exempt from IHT if the donor survives for seven years.
To be scrupulously even-handed, Mum and Dad wanted to give each child £300k at the same time but were concerned that this might demotivate them at the outset of their careers and wanted to be sure that all three would use it sensibly and appreciate its value.
We agreed to give them their own financial planner – me. I met each of them individually to talk about their own plans and objectives. Each agreed that they wanted to use the money as the deposit on a house but as all three live in London they would still need a substantial mortgage and none had the earnings yet to achieve that. So, they each agreed to hold off buying for five years. Through ongoing discussions, I have coached each to examine how much they spend each month and set up savings plans to add to the initial gift. They all now understand the principles of budgeting and investing and the importance of constantly monitoring your plans.
Each agreed that they wanted to use the money as the deposit on a house but as all three live in London they would still need a substantial mortgage and none had the earnings yet to achieve that
We have invested the money in a balanced multi-asset portfolio that has already generated an extra £35,000 for each of them (despite the crisis). We will reduce the risk on this as we get closer to the point of purchase. All three are writing wills, gifting their estate to their siblings in the event of anything terrible happening to them at this point (as without a will the money would automatically return to their parents’ estate starting the whole 7-year gift cycle over again).
Top Tip
Lee Goggin
Co-Founder
The results:
It has been rewarding to see their knowledge expand and they have valued having someone nearer their own age, and independent of their parents, to talk through major financial decisions. I challenge their decisions and that helps them to work out what they really want. They have seen their money grow in the 18 months it has been invested, the impact of the crisis and the recovery that followed. That will stand them in good stead for investing later. They have become smarter about budgeting. All are saving. None takes their gift for granted.
Meanwhile Mum and Dad have, potentially, reduced their IHT liabilities by £400,000 and can continue to review IHT planning for the rest of their estate with greater confidence
Meanwhile Mum and Dad have, potentially, reduced their IHT liabilities by £400,000 and can continue to review IHT planning for the rest of their estate with greater confidence. They know that their children are better prepared for inheritance and are going to use money they are given wisely.
