Financial Planners (New), Inheritance Tax

Consider the case of Mrs Lorna Doone, above, who is an 81 year old widow in 2011. She has a state pension, and assets comprising her home, car, contents and other property comprising a bungalow and a farm, all as shown in the Yearly Breakdown, below.

The Yearly Breakdown, above, includes £14,400.00 income from her other two sources of income, which are from renting out the bungalow and farm, as shown in the fact find, below. Note how the “Final year” and “End sum” is entered as zero for incomes that continue until death.

Her rental income and state pension in 2011 after tax gave her a total net sum of £17,781.44. Unfortunately this is not enough to cover her annual expenses of £20,500 so she’s increased her debt in this year by £2,718.56.

As you can see below, her pension requirement of £20,500 p.a. is not being met by her state pension and on-going gross income of £19,711.80 (leaving her £788.20 short in 2011).

So her on-going Cash Flow does not look good, as shown below (n.b. the actual sums are not huge)…

…though her Net Worth is excellent (n.b. the sums are large), and moreover is growing every year thanks to the effect of the value of her property increasing by 1% more per year than the overall rate of inflation.

This in turn will leave her family with a serious Inheritance Tax Liability….

…which could be covered by a £400,000 Increasing Whole of Life policy made in trust for the next of kin, as shown below. Note two important issues regarding this…

a) Be careful to select the “in trust” option in the fact find. If not made in trust then it will just increase the value of the estate and the associated inheritance tax liability.

b) Although an “in trust” policy will be available to the next of kin, as shown in the graph below, it will not reduce the client’s own Inheritance Tax Liability (i.e. the graph above). You can however show the effect by using the Custom Graphs button and selecting to show “General / Inheritance Tax Liability” versus “Existing Life Policies / Increasing Whole of Life”….

The other way of reducing the Inheritance Tax Liability would be to give some assets away, as also included in the fact find illustrated above. In this case the Whole of Life policy (in green) will be more than adequate to cover the IHT liability (in blue), which you can clearly see reducing over seven years as the bungalow’s value (in red) is removed from the estate.