The two most common succession planning goals for many families are supporting the educational needs of future generations and mitigating Inheritance Tax (IHT). Making well‑structured gifts during one’s lifetime can play a crucial role in achieving both, particularly where education costs are rising faster than inflation.
Private Client Tax Partner Stephen Kenny, and Head of Financial Planning at Credo Wealth, William Godsave, highlight some of the issues to consider and explain how they successfully set-up a structure to efficiently meet these two goals for one family.
The growing importance of Inheritance Tax and succession planning for families
The recent arrival of their first grandchild and the hope for more grandchildren to come, prompted a client – a couple in their late 60s with three adult children – to start looking at ways of helping to fund the rising costs of private school and potentially, university education for their future grandchildren.
At the same time, the couple wanted to minimise their IHT burden for the next generation which was continuing to rise each year as the value of their assets increased and the tax free IHT nil rate bands continued to stay the same. They wanted to ensure that reducing IHT was factored into their tax planning strategy and were keen to do so by making gifts through their lifetime.
Key considerations
- Affordability and long-term financial planning – Having recently retired, the couple needed to ensure that they had sufficient assets for their own requirements and other goals over the next few decades before making plans for future generations. Cash flow modelling tools were used to map out their potential future position using a number of scenarios and these were then stress tested under different conditions, including inflation, investment volatility, and care/medical needs.
- Choosing the most tax‑efficient way to fund education – The couple’s existing asset base, which included personal pensions and investment bonds, was analysed to identify the most effective way of funding the gifts, taking into account the potential tax on withdrawal from their accounts.
- Maintaining control and protecting family wealth – The level of control that the couple wanted over the “education fund” was discussed including, whether they wished to remain in control of how and when the gift was made and the protection of funds in the event of a divorce or the bankruptcy of their children.
- Investment strategy for rising school and university fees – In view of the long timeframe and expectation that school fees will rise above the rate of inflation, the couple required a portfolio that would grow by at least the rate of school fees increases.
- Ensuring fairness across future generations – Nothing can ever be taken for granted when it comes to children and so options were considered that took into account how the fund would be used in the event that the three children had a different number of children or no children at all.
Using a discretionary trust as part of an Inheritance Tax planning strategy
A discretionary trust was established with an initial gift of £650,000. The funds would be held via an investment bond wrapper and invested into a portfolio mainly consisting of equities and alternatives. In future, the couple plan to use income withdrawals from the pension to top up the education fund.
The benefits of this approach
In addition to enabling the couple to achieve their desired outcome, the approach taken has other benefits:
- IHT mitigation – The initial gift would be outside their estate after seven years saving 40% tax, while the top ups should be immediately exempt from IHT using exemptions.
- Tax on investment growth – The investment bond would provide a very tax efficient way of extracting growth, enabling gains to be assessed on the grandchildren.
- Investment growth – The investment solution provided the opportunity for long term growth in a diversified manner to ensure that the fund kept pace with school fee increases.
- Control and flexibility – The discretionary trust structure provided the couple with control over the timing, quantum and destination of the benefits which was important to give flexibility to adapt to changes in future circumstances.
Final thoughts on effective Inheritance Tax and succession planning
Despite the increasingly challenging tax environment, there are still many ways to structure your estate efficiently to reduce tax and help you meet your goals. Early preparation and collaborative tax and financial advice is the key to ensure your objectives are met in the most optimal manner.
At PKF, our Private Client and Wealth Management specialists work closely with families to develop tailored Inheritance Tax and succession planning strategies, helping them protect and pass on wealth efficiently while supporting long‑term goals such as funding future education.
Important Notice
This marketing material has been prepared and issued in the United Kingdom by Credo Capital Limited (“Credo”). It is provided to you for discussion purposes only and does not constitute and should not be interpreted as either investment advice (including legal, tax or accounting advice) or a trading recommendation. This marketing material is not a solicitation to buy or sell any financial instruments or commodities, a recommendation to participate in a particular trading strategy or to invest into regulated or unregulated funds. The value of an investment can fall as well as rise and is not guaranteed, your capital may be at risk and you may not receive back your original investment in full.
PKF Littlejohn is not licensed to provide financial advice. Whilst Credo is independent from PKF Littlejohn, through a joint venture owned by PKF Littlejohn and Credo, PKF is entitled to a proportion of all fees arising from any advice given by Credo. If you have any questions about the relationship between Credo and PKF Littlejohn please contact your usual PKF Littlejohn contact or Stephen Kenny.
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