An innovative way to save Inheritance Tax

Sep 4, 2019 | The Next Generation, Tony Byrne's View

A client of ours, Philip, prematurely died a year ago at just age 66. He was single at the time of his death, having become diagnosed with Lewy Body Dementia only a couple of years earlier. This disease is a rare form of dementia which is even worse than Alzheimer’s. Like Alzheimer’s, it leads to problems with thinking, movement, behaviour and mood.

Fortunately, our client had taken advice from us before diagnosis when he was completely compos mentis.  He had a Will and Lasting Power of Attorney Property and Financial. His two brothers were both his executors and attorneys. They were named in his Will as the sole beneficiaries of his estate.

He was an expert in his chosen profession and carved out a successful sole career of broadcasting on BBC Radio 5 Live as well as writing for the national press. He even wrote his own books. He was a successful linguist too. The only sport he ever followed to my knowledge was cricket which he loved with a passion. He was very eloquent and had a marvellous voice for radio. He was one of those rare people I would call an expert in his field. He was also a bit of an eccentric which made him quite an interesting character.

His brothers started acting as his attorneys a couple of years ago. At the time, their brother had been given c.five years to live.  Within 12 months he was admitted into a care home. We then set about making recommendations to his brothers how to manage his estate while he was in care. Naturally, the subject turned to Inheritance Tax.

Our client had decided to leave his entire estate to be divided equally between his two brothers.  His estate was worth about £2.5 million including a house worth in the region of £700,000. His pension was valued at £600,000. The rest of his estate was invested mostly in investments with a small amount in cash.

I calculated that his Inheritance Tax liability was c.£630,000. I was keen to find ways to mitigate this Inheritance Tax liability further. Our client had previously planned to leave his entire estate to his own charity which we had helped him to create 15 years previously, but he had changed his mind, re-written his Will and left his estate to his brothers instead in spite of the adverse consequences for IHT purposes. His original Will would have saved IHT on his entire estate if he had left it all to his own charity because gifts to charities are 100% exempt from Inheritance Tax.

I recommended an investment of £200,000 into the Foresight Accelerated Inheritance Tax Solution.  This is a unique IHT mitigation scheme. It consists of an investment into a 100% Business Relief qualifying investment with life insurance for the first two years. The life insurance is used to pay the Inheritance Tax if the plan holder dies prematurely. Business relief means that as long as the investor survives two years the investment becomes free of Inheritance Tax. The life insurance pays the tax if the investor dies less than two years after investing in the plan and their estate suffers 40% (in this case £80,000) Inheritance Tax.

Unfortunately, despite the five-year life expectancy diagnosis our client accidentally fell down the stairs in his care home and fractured his skull. Within days he was dead. One year after investing in the plan. The life insurance payout was successfully claimed for £80,000.

One of our client’s investments was an investment bond worth £200,000. It had an accidental death clause in it. What this meant was that when he died from his accident the policy paid out an extra 10%, £20,000.

So, the two insurance payouts effectively reduced his IHT from £630,000 to £530,000. Of course, the two brothers were delighted with the outcome financially though obviously saddened at the loss of their brother.

So if you would like advice on how to minimise Inheritance Tax in a simple, easily understood way, why not get in touch with us? You know it makes sense.


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