Case Study #3

Married couple with a large rental property portfolio

Clients Situation

Mr and Mrs Patel were in their mid-70s and had both been fully retired over 15 years. They owned 12 buy to let properties worth around £8 million with only small mortgages on some but with a large potential capital gain tax liability of over £2 million.

  • Mr Patel had a small pension income of just over £10,000 a year including his state pension. Mrs Patel pension income was just over £12,000 a year net including state pension. They were spending around £50,000 but had a significant had significant surplus income of £5000 a month from their property portfolio.
  • Their main residence was valued at around £1.8million in which they wanted to remain long term with no plans to sell unless they went into care.  They had no investment portfolio and around £200K in cash.
  • Their total current Estate (excluding pension which are already in trust) was £9,300,000 on which their current IHT liability was £3,462,000 as they expected to pay off the mortgages soon. The Residential Nil Rate Band is lost as the Estate is over £2.7 million.
  • Mr and Mrs Patel were married with two married sons and a daughter and had six young (under 16) grandchildren who they wanted to help to pay towards University education.
  • Their main concern in this case was around inheritance tax and if one of their children got divorced.
  • Mr and Mrs Patel were adding to their capital annually and the value of their assets was growing. It was projected that their IHT problem could in fact easily double (probably more) by the time the second spouse died.
  • They did not want to simply give money to their working children as they were concerned about divorce of their children, and they would need capital in the event they need long term care. However, they were keen to eliminate any IHT for their children.
  • They were both higher rate income taxpayers for income tax purposes due to the income from their property portfolio.
  • They needed to keep and control some income from the property portfolio to meet their own lifestyle needs but did not want to pay the IHT if they retained the properties personally.

The main problems the clients would face if they took no action

The main problems the clients would face if they took no action

  • Their main concern in this case was around inheritance tax and if one of their children got divorced.
  • Mr and Mrs Patel were adding to their capital annually and the value of their assets was growing. It was projected that their IHT problem could in fact easily double (probably more) by the time the second spouse died.
  • They did not want to simply give money to their working children as they were concerned about divorce of their children, and they would need capital in the event they need long term care. However, they were keen to eliminate any IHT for their children.
  • They were both higher rate income taxpayers for income tax purposes due to the income from their property portfolio.
  • They needed to keep and control some income from the property portfolio to meet their own lifestyle needs but did not want to pay the IHT if they retained the properties personally.

The recommended solutions

  • Bluebond worked with Mr and Mrs Patel to determine and agree an overall long term strategy and carry out some of the detailed work and put some of the plans into place.
  • For the biggest problem of the property portfolio, Bluebond advised to discuss setting up a property partnership with our Accountants and add their children as partners. After 3 years they would claim incorporation relief and convert to a Family Investment Company as a potential solution. Once the Family investment company is set up capital shares can be passed from MR and Mrs Patel to an Employee Benefit Trust and thus be immediately outside their estate for IHT. After full discussions they decided to proceed with this particular strategy with our Tax accountants.
  • Bluebond's Trust company and Lawyers set up new Wills and separate Trusts for the clients to protect all the assets in the event of divorce of any of their children or grandchildren.
  • Mr and Mrs Patel were introduced to our firm of Independent Financial Advisers who, over a series of steps, agreed and set up the following plans :
  • Joint life second death standard policy in Trust – paid by fixed fee to covering IHT on the main residence
  • Joint life second death maximum policy – paid by fixed fee to cover some of the liability of the other assets over the next 10 years before other plans became effective.
  • Investment of £650,000 into two offshore bonds held subject to two Reversionary Trusts. This money would provide security if they ever needed long term care. They got this money from an equity release of the main residence and also mortgaging a BTL property.
  • Reviewed and advised on the existing pensions and investment portfolio and moved some to a Discretionary Fund Manager.
  • Set up new pension funds for the children from the Family investment company and also use the company to pay for university education for their grandchildren.
Benefits of 6 Trusts for Estate Planning
Benefits of Life policies
Benefit of Reversionary Trusts
Benefits of the property partnership
Benefits of the Family investment company

Benefits of solutions used

Benefits of solutions used

Benefits of 6 Trusts for Estate Planning
Benefits of Life policies
Benefit of Reversionary Trusts
Benefits of the property partnership
Benefits of the Family investment company

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