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John & Sam's Story

Inter-generational Tax Planning at its best, The Calder Group. 

The story of John and Sam’s experience with The Calder Group began many years before we first met with them at our Southeastern office in Maidstone, Kent.

It goes back one generation, to Sam’s father, who unfortunately passed away in 2014, at the age of 79. After passing, his post-tax estate of around £500,000 passed to Sam’s Mother, Eileen. This wish was written clearly in his will, and meant that he could pass away in a degree of comfort, knowing that Eileen could succeed him and maintain a healthy standard of living without him, while she continued to reside in their family home just down the road from John and Sam. 

Taking this forward a few years to 2021, when Eileen also, unfortunately passed away. Upon the valuation of the estate, it was uncovered that she has a total estate worth £650,000 (including the money inherited from her husband, 5 years prior). Eileen had made it clear in her will and estate plan that all of her liquid assets would be inherited by her only daughter, Sam.

Which, once inherited by Sam after tax, was a figure of £650,000. (0% tax)

Importantly, Sam (or Eileen) at this point, had paid no inheritance tax on the money they’d inherited, thanks to the Nil Rate Band

‍The “Nil Rate Band”:

The Nil Rate Band is also known as The Inheritance Tax Threshold, and is conceptually similar to the “personal allowance” income tax bracket, where the first £12,500 of someones income is Tax-Free. Just like this, the Nil Rate Band dictates that the inheritance tax on the first £325,000 of any individuals estate sits at 0%.

With that said, why did Sam pay £0 of inheritance tax on double that?

Fortunately, there is a rule which allows someone to “transfer” their unused Nil Rate Band to a spouse upon their death, and because Sam’s Father used none of his Nil Rate Band, the Nil Rate Band available to Eileen was 60%. Hence the 0% tax rate on Sam’s inheritance. 

‍It was at this point after becoming aware of the potential tax implications, and with their own futures in mind, John and Sam came to us for advice. 

They had a handful of ideas of what they wanted to do with their own estate once they passed, and knew that were going to run into a handful of tax liabilities that they wanted to handle as intelligently as they could. So it all began with a phone call after hearing about us from some family friends. 

Once we met, we uncovered that their total estate was worth £1,350,000, between their own value and that of which they inherited from Sam’s mother.  

Their intentions were to gift £100,000 of their inherited £650,000 to their son as soon as possible, and wanted to use the remainder of the money to maintain their lifestyle while they could. 

We informed them that their gift to their son will be classed as a potentially exempt transfer, which will have 7 years to fall outside of their estate. 

The “potentially exempt transfer”:

The potentially exempt transfer is a term that is held in status until someone passes away. In the case of John and Sam, they had one potentially exempt transfer, the one worth £100,000, which was made to their son. 

The “transfer” part of a PET is a transfer made as a gift to friend or family. 

The “exempt” part of a PET is it’s potential to be exempt from an inheritance tax liability in the case of someones death. 

The “potentially” part of a PET is due to the fact any PET is subject to failure if the benefactor dies within 7 years of the transfer. 

‍Assuming, as always, for the “worst case scenario”, we identified that their Inheritance Tax Liability now sat at £140,000, (Nil Rate band and Main Residence Allowance x 2 = £1,000,000)

So, what did we do?

We created a Deed of Variation to Change Sam’s will, and we create a trust in John & Sam’s name. Now, all assets pass to a trust less the £100,000 gift to John & Sam’s son now done through Mrs. A’s will. 

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