Alan and Sally had been married for 18 years when they were both killed in a car accident on the way home from a weekend away. They left two children – James, 16 and Ann, 14.
They owned their home, valued at £475,000 on which there was a mortgage of £150,000 outstanding. Alan was employed on an annual salary of £47,000 and his employer paid into his pension plan, valued at £154,000 with a death in service benefit of 3 times salary, for which Sally was the nominated beneficiary. He also had a company car and savings of £65,000 in a Cash ISA. Sally was also employed with a salary of £18,000 per annum. She was a member of her company’s Group Pension Plan, which had a value of £52,000 and a death in service benefit of 2 times salary. Alan was the named as the person she wished to receive the benefits.
Their joint life 1st death insurance policy, with a sum assured of £150,000, was taken out to protect the mortgage and, to protect the family, Alan had a single life policy with a sum assured of £200,000 which expired when Alan reached age 60, in just over 10 years, but (which?)was not written under trust.
They had a Mirror Will which left all their assets to one another, or if they both died, then their assets were to be split equally between the two children.
The following example shows how the IHT liability would be calculated.
As Alan was the older of the two, he was deemed likely to die first.
List of Alan’s assets:
| Asset | Value |
|---|---|
| House (As joint tenants, house value passes to Sally) | £0,000 |
| Cash ISA | £65,000 |
| Pension Fund (Would pass to Sally) | £0,000 |
| Death in Service Benefit (3X£47,000) would pass to Sally | £0,000 |
| Joint Life Policy (would be paid to survivor) | £0,000 |
| Life Insurance Policy (As no in trust would be paid to Alan’s Estate. | £200,000 |
| Value of Alan’s assets = | £265,000 |
As Alan and Sally were married, and the Will leaves everything to Sally, no Inheritance tax is liable on Alan’s death under the spousal exemption.
List of Sally’s assets:
| Asset | Value |
|---|---|
| House | £475,000 |
| Alan’s Cash ISA | £65,000 |
| Alan’s Pension Fund | £154,000 |
| Alan’s Death in Service Benefit (3X£47,000) | £141,000 |
| Joint Life Policy | £150,000 |
| Alan’s Life Insurance Policy | £200,000 |
| Sally’s Pension fund | £52,000 |
| Sally’s Death in Service | £36,000 |
| Value of Sally’s assets = | £1,273,000 |
| Less Liabilities (Mortgage) of = | £150,000 |
| Total value = | £1,123,000 |
The Inheritance tax liability could be calculated as follows:
| Asset | Value |
|---|---|
| Total estate value | £1,123,000 |
| Allowable Deductions | |
| Alan’s Nil Rate Band | £325,000 |
| Sally’s Nil Rate Band | £325,000 |
| Alan’s Residential Nil Rate Band | £125,000 |
| Sally’s Residential Nil Rate Band | £125,000 |
| Total Allowable Deductions | £900,000 |
| Taxable estate = | £223,000 |
| IHT Liability @ 40%= | £98,200 |
However, one of the executors asked if LR Financial Services Ltd could help and after reviewing the assets of the estate and speaking to the pension and death in service providers, it transpired that as Sally’s pension benefits were payable under an expression of wish, the trustees agreed to pay the benefits in to a stand-alone trust, with the children as beneficiaries, rather than in to Sally’s estate. It was also agreed with the executors and beneficiaries they would utilise both parents Annual Exemptions for the current and previous tax years, and pay them into the trust.
By following our advice: The Inheritance tax liability was calculated as follows:
| Asset | Value |
|---|---|
| Total estate value (reduced by sally’s total pension and Death in Service Benefits of £88,000) | £1,035,000 |
| Allowable Deductions | |
| Alan’s Nil Rate Band | £325,000 |
| Sally’s Nil Rate Band | £325,000 |
| Alan’s Residential Nil Rate Band | £125,000 |
| Sally’s Residential Nil Rate Band | £125,000 |
| Alan’s Annual Exemptions (current and previous) | £6,000 |
| Sally’s Annual Exemptions (current and previous) | £6,000 |
| Total Allowable Deductions | £912,000 |
| Taxable estate = | £123,000 |
| IHT Liability @ 40%= | £49,200 |
Giving a tax saving of some £49,000
Please contact LR Connections on 0345 314 8972 for an appointment to discuss how we could help you.
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