wealth tax

How can we transfer wealth to future generations tax efficiently?

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  • These investors want to grow their assets and pass them tax efficiently to their children and future grandchildren
  • If Ralph’s wife does not need her Sipp for income it could be passed onto her beneficiaries tax efficiently
  • They could consider investing in assets which offer business relief so are not liable for IHT

Reader Portfolio


Ralph, his wife and family


65 and 64

Description

Pensions, Isas and Sipp invested in funds and shares, VCTs, cash, residential property.

Objectives

Make gifts to children, help possible future grandchildren with education and home buying costs, mitigate IHT, average annual real investment return of 5 to 6 per cent over the long term. 

Portfolio type

Inheritance planning

Ralph is age 65 and his wife is 64. They receive defined benefit pensions (DB) of £84,000 and £27,500, respectively, a year before tax. His wife also receives a Swiss state pension of £2,000 a year, and will receive a UK state pension of about £9,300 a year from age 66 and half of Ralph’s DB pension after he dies.

Their home is worth about £900,000 and is mortgage free.

Their two adult children are financially independent. Ralph and his wife gave each child £300,000 to help them buy homes and the mortgages on these are nearly paid off. The children are also likely to inherit £250,000 each from a grandparent in a few years.

Ralph and his wife also featured in the Portfolio Clinic in January 2019, and he has followed up on a number of the suggestions that were made (Go back to basics – and use the seven-year rule, IC, 04.01.19) 

“We would like to help possible future grandchildren with education fees and property purchases,” says Ralph. “So we would like our investments to make average annual real returns of 5 to 6 per cent over the long term, probably for 20 years or more, and to transfer wealth across the generations of our family efficiently.

“I have kept good income and expenditure records over the past 10 years. Our average yearly outgoings are £30,000 to 40,000 a year so significantly less than our income. I have a likely terminal illness with a life expectancy of one to two years. And after my wife is age 66 her total income after tax should be about £61,000 a year. If she needs care in later life and a care fee cap of £86,000 is introduced in 2023, she will be able to pay for this out of her income.

“So we plan to make gifts out of income to our children, and or to possible grandchildren. We have been helping our children to pay off their mortgages and kept good records of our gifts to them. There may also be further contributions to my wife’s self-invested personal pension (Sipp).

“We have taken out two second death insurance policies which will total £310,000 over the next 20 years, and cost £1,200 a year. Payments from these will go into a trust of which our children are the trustees and beneficiaries. I estimate that this will cover all the inheritance tax (IHT) due on our estates.

“We will also look to get advice on how to manage IHT and we have taken out lasting power of attorney for financial affairs.

“I manage my own and my wife’s investments, most of which are in individual savings accounts (Isas), and her Sipp. I also manage my children’s lifetime individual savings accounts (Lisas) and Isas (see charts). For asset allocation purposes, I treat all these accounts as one portfolio. I am also trying to interest and involve my children as much as possible in this.

“As we are not reliant on our investments for income I am happy to accept a fairly high level of risk. I hope that I would consider losses as purchasing opportunities.

“I first invested in 1986 when I bought shares in British Gas but nowadays I prefer collective investments to direct share holdings. I invest in both passive and active funds to try and keep costs down, and try to diversify our investments globally.

“I have also diversified my venture capital trust (VCT) holdings widely to try to reduce their risk. As I aim to keep my taxable income below £100,000 year and mostly use my entire annual Isa allowance, the VCT’s tax-free dividends have been especially attractive. But I make sure that the VCTs do not account for more than 10 per cent of the investment portfolio. I am now thinking of selling and repurchasing VCT shares that I have held for at least five years.”

 

Ralph and his wife’s total portfolio

Holding Value (£) % of the portfolio
Cash 239,283 21.91
HSBC MSCI World UCITS ETF (HMWO) 105,128 9.63
Scottish Mortgage Investment Trust (SMT) 69,240 6.34
Vanguard FTSE All-World UCITS ETF (VWRP) 67,614 6.19
NS&I Index-linked Savings Certificates 63,733 5.84
Stewart Investors Asia Pacific Leaders Sustainability (GB0033874768) 62,520 5.73
Worldwide Healthcare Trust (WWH) 52,296 4.79
iShares Core S&P 500 UCITS ETF (CSP1) 51,220 4.69
Legal & General Japan Index Trust (GB00BG0QP828) 47,923 4.39
iShares S&P 500 Information Technology Sector UCITS ETF (IITU) 37,089 3.40
Vanguard FTSE Developed Europe UCITS ETF (VEUA) 28,809 2.64
Unite (UTG) 28,250 2.59
Primary Health Properties (PHP) 24,576 2.25
Threadneedle (Lux) European Select (LU1598421698) 23,508 2.15
Vanguard FTSE 250 UCITS ETF (VMIG) 23,460 2.15
HICL Infrastructure (HICL) 18,458 1.69
Hargreave Hale AIM VCT (HHV) 16,864 1.54
Schroder Asian Income (GB00BDD29849) 16,374 1.50
Northern Venture Trust (NVT) 14,591 1.34
Northern 3 VCT (NTN) 13,631 1.25
Northern 2 VCT (NTV) 13,584 1.24
Foresight VCT (FTV) 12,495 1.14
Baronsmead Second Venture Trust (BMD) 11,313 1.04
SVS Aubrey Global Emerging Markets (GB00BNDMH797) 10,238 0.94
Baronsmead Venture Trust (BVT) 9,626 0.88
Albion Technology & General VCT (AATG) 7,175 0.66
Albion Enterprise VCT (AAEV) 7,152 0.65
Crown Place VCT (CRWN) 7,035 0.64
Kings Arms Yard VCT (KAY) 6,624 0.61
Puma VCT 10 (PUMX) 2,162 0.20
Total 1,091,971  

 

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS’ CIRCUMSTANCES.

 

Chris Dillow, Investors’ Chronicle’s economist, says:

You’e well diversified both geographically and across different asset classes, with NS&I Index-linked Savings Certificates and cash protecting you from inflation and equity bear markets. And you’re using tracker funds well, with only small allocations overall to active funds and direct share holdings. 

You are also making good use of VCTs which I applaud for two reasons – neither of which are their tax breaks. Disproportionate amounts of future company growth might come from unquoted firms because the UK stock market is already dominated by mature companies, many of which have gone ex-growth. And as it is almost impossible to predict which companies will succeed in the long term – in particular with unquoted companies – you need to spread money across several funds. One or two great successes or failures can result in big differences in VCTs’ performance so diversifying across VCT managers spreads risk.

Your US exposure, which you get via global and US equity tracker funds, and Scottish Mortgage Investment Trust (SMT), should have served you well for years. But with the Nasdaq Composite index down 14 per cent between the start of this year and late February, should you reduce the exposure to US equities?

Losses can be buying opportunities, but history warns us that they can be enormous before the buying…

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