IHT Planning advice required - DGT etc

[sinteur]

My situation in brief:

Father aged 84, just starting Alzheimers, EPA registered with Court of Protection last year.
His house just sold before Xmas, total assets including house proceeds over 700K so IHT will be a problem.
Was in middle of planning stuff like DGT with adviser from Edward Jones, now taken over by Towry Law and all advisers in that EJ office laid off. 6 weeks later, Towry Law still hasn't contacted me to appoint new adviser. Funds from house (over 400K) sitting in cash not yet invested.
Not sure which adviser I will get and when (!!) and whether they will have expertise necessary to give this sort of advice. Noticed someone on this forum from Towry Law so maybe they could reply here to explain how advisers get appointed upon takeover of smaller firms.
Father in great health apart from mild Alzheimers, in nursing home. Both his parents lived to 91.
I live in Australia (father in Bolton near Manchester) so very hard to communicate effectively and build trust with adviser. Everything has to be done by email and around time differences. I am sole beneficiary of will and holder of EPA.
Need advice urgently on whether DGT is even an option and not living in UK I am a bit confused as to how they actually work, particularly if person does not live 7 years.
Do I have any other options available - lifetime trusts??
Already using the small bickie options like 3K annual gift, 250 pound one off to family members, regular gift of surplus income but this will not reduce IHT bill by that much.

Thanks in advance

Barbara Sinteur

[Anthony Nixon]

Was your father widowed?

If so he may have a transferable nil rate band from his wife's estate which would increase, and could double, the £325K free of IHT on his death.

The other point to bear in mind at this stage is that, if you and your father want to arrange gifts to save IHT further, these will, almost certainly, not be authorised by the EPA. So you ought to make a specific application to the Court of Protection for approval of any gift. This is not as hard as it sounds, but HMRC are likely to challenge gifts by attorneys that are not properly authorised.

Anthony Nixon CTA TEP Solicitor
Partner, Thomas Eggar LLP, Southampton and Chichester
anthony.nixon@thomaseggar.com
023 8083 1224

[sinteur]

Yes father is widowed but used up almost all of Mum's nil rate band upon her death through deed of variation. About an extra 40K to still be transferred giving him total of 375K.

Yes had heard that would have to apply to Court to get any gift approved even though I hold EPA. How do I go about this - is there a form to fill in? Do you apply once you know what type of investment you want to make (DGT, straight gift, other kind of trust etc) or can it be done in advance just in case you decide to set one up? Any website etc would be useful. The other EPA (joint and several) is Dad's solicitor who is not really full bottle on any of this stuff - a small town probate and conveyancing firm really.

Thanks heaps

Barbara

[Christian Ward]

Barbara

I posted a response to your previous though related post in July 2009 and this response is still valid.

I agree that trying to organise your father's affairs from Australia is going to be challenging particularly where you have to deal with court of protection/public guardian office issues. Trying to find a suitable financial planner is always difficult let alone not being able to meet in person.

I am not sure that the Discounted Gift Trust is the best way forward. Business property relief (BPR) qualifying investments are exempt from IHT after just 2 years rather than the 7 years required for a DGT or outright gift. The BPR route has the further benefit that your father would not need to gift anything. The DGT option is heavily reliant on the discount available. This will be specific to your father’s situation and it would be imperative that he undergoes full medical underwriting at outset to reduce the potential for HMRC disputing the discount if your father were to die within 7 seven years. The ‘standard’ discount for an 84 year old male taking 5% income per annum would be approximately 28%. Therefore an investment of £100,000 would involve a gift of £72,000 with the £28,000 being the discount. This discount is deemed to be the open market value of the right to the ongoing income retained by your father, and effectively ‘vanishes’ on death as this right becomes valueless. It is important to remember that the discount is only advantageous if the settlor dies earlier than their life expectancy would suggest, and even then only if death occurs within the seven years. An 84 year old male has a life expectancy of approximately 6 years so the discount would only be of value if the settlor did not survive for six years, and this assumes that he is underwritten on normal life expectancy and not rated.

You state that you are the only beneficiary and therefore your Australian tax residence also needs to be considered in the planning. A bare DGT could cause unwanted tax implications for you on your father’s death depending upon how the trust is established.

The combination of your fathers Alzheimer’s and your non-residence makes the importance of receiving advice critical. I think you will need advice from a qualified legal and tax professional as well as a financial planner.

Feel free to email me if you would like some further information.

[sinteur]

Thanks for your help. The BPR/AIM route does sound the better option but upon doing some research on them, they sound expensive to set up re entry fees and management costs versus standard managed funds. My concern is that if my father dies within 2 years, I will have paid a lot in fees, got no IHT relief and be left with a high risk investment that is potentially illiquid. Any comments on this??

Do wealth managers in the UK ever offer discounts on entry fees or charge on a fee for service basis rather than commission? This is how it is commonly done in Australia - the investor has negotiating power regarding fees to an extent and planners are becoming a lot less commission based.

Also, can anyone give me examples of AIM managers who sell portfolios of stocks specifically for IHT relief (ie only those companies which qualify for BPR). Do they have league tables of how they compare with each other performance wise?

Thanks a lot

barbara

[Christian Ward]

As always there is a trade-off for the 2 year period for IHT relief. This often comes in the form of the issues you mention - higher fees, higher investment risk and illiquidity - unfortunately you can rarely have the best of both worlds. BPR schemes for inheritance tax mitigation vary from AIM share portfolios to property based structures and other business structures that try to overcome some of the aforementioned downsides. Personally I find these other business structure schemes more suitable than AIM portfolios for clients in their later years who just want to 'bank' the IHT relief. Low risk means low return so you shouldn't expect to make much in terms of investment returns. AIM portfolios offer a much higher investment risk/return. You should seek specialist independent advice as to whether these types of structure are suitable for your father's situation.

http://www.taxefficientreview.com/iht/iht_open.asp contains some further information on companies providing some BPR schemes, although an adviser will be able to provide detailed advice and access to other schemes.

Most professional financial advisers now operate solely on a fee basis, some still offer the choice of fees or commission. I suggest that you choose an adviser who only offers fee-based services. The issue of commission is then irrelevant.

[sinteur]

Thanks for all the help so far. I am getting my head around AIM IHT funds now and think that is the way to go based on my father's age and state. Woudl ideally like insurance protection and note that there are 3 funds which offer this - Octopus, Oxford Gateway and Willams de Broe. How can I get track record/performance comparisons of these funds? Would it make sense to diversify across all 3 rather than invest all funds with one manager?

BPR schemes for inheritance tax mitigation vary from AIM share portfolios to property based structures and other business structures that try to overcome some of the aforementioned downsides. Personally I find these other business structure schemes more suitable than AIM portfolios for clients in their later years who just want to 'bank' the IHT relief.

What are these "other business structure schemes"? Do you mean funds like Octopus?

As my father is 84 and on Aricept medication for mild Alzheimers, is getting any downside insurance cover extremely unlikely? He is not on any other medication and has good general health.

I realise that the AIM portfolio has to be held until the person's death to get IHT exemption (and for the 2 years or more). What happens at death when the probate process kicks in? Can the executor sell the AIM portfolio immediately after death to get out of this potentially volatile investment or does it have to be held until probate is granted which can take months or even years. Wasn't sure if an executor has that power (and I am not the executor anyway). I am concerned that it might then do a nose dive in value without any insurance being in place after death.

Continued thanks, this is all really helping my understanding before making decisions on getting a planner involved.

Barbara

[maths]

I realise that the AIM portfolio has to be held until the person's death to get IHT exemption (and for the 2 years or more). What happens at death when the probate process kicks in? Can the executor sell the AIM portfolio immediately after death to get out of this potentially volatile investment or does it have to be held until probate is granted which can take months or even years. Wasn't sure if an executor has that power (and I am not the executor anyway). I am concerned that it might then do a nose dive in value without any insurance being in place after death.

I can't comment on Octopus etc.

An executor takes title to the deceased's assets on death. A grant of probate enables the executors to prove that this has occurred.

Thus, although theoretically an executor could sell the deceased's assets soon after death, the practical reality is that organisations do not normally allow this to happen until the executor can prove their title ie probate is necessary.

As you indicate, until sale the beneficiaries are at risk re a fall in value.

[draftsmann]

HMRC's view on valuations of gifted and retained interests under discounted gift schemes settled by individuals whose health isn't good, together with the need to obtain PGO approval for a gift into trust, mitigate strongly against the discounted gift scheme in my view.

There are alternatives that do not entail the making of gifts (and therefore do not require an application to the court) - one as already mentioned being the purchase of AIM or other unquoted shares that will after two years qualify for business relief.

There are other, less well-known contract-based solutions that will achieve an immediate saving of inheritance tax in such cases. These arrangements typically involve the use of very specialised insurance or annuity contracts. You would need to obtain advice from a specialist practitioner in connection with this.

Adrian Sacco TEP
The Trust Shop