Case studies

Married couple, Roger and Carol, are 68 and 67 respectively. Roger was the director of his own limited company. Roger and Carol owned their main residence and had considerable savings and investments totalling around £1.2 million.

They were in receipt of a £70,000 pension income, including occupational and state pensions.

As Roger and Carol had good pension income and plenty of savings, Roger hadn’t drawn any income from his company. This meant there was a cash balance of around £650,000 in the business.

Roger wanted to retire and didn’t know what to do with the cash in the company. It wasn’t a trading asset, so didn’t qualify for business property relief, which meant it would compound his inheritance tax liability. Equally, he didn’t need income or capital from it, so drawing the cash out or winding the company up would trigger a significant income tax or capital gains tax bill.

Roger and Carol also wanted to mitigate the prospect of significant inheritance tax being paid by their estate when they both passed away.

We completed a budget planner and cashflow model, establishing the level of income that Roger and Carol needed to achieve their objectives. We discussed their attitude to investment risk, their experience with investing and their capacity for loss, in order to ensure any recommendations were suitable.

We concluded that they should take the following actions:

• Draw £650,000 from the business in the form of a one-off dividend payment. This resulted in a £194,000 income tax liability.
• Invest £600,000 into Enterprise Investment Scheme (EIS) portfolios and £50,000 into a Seed EIS.
• Place £650,000 (£325,000 each) from their savings and investments into a discretionary trust.

Roger has now retired and his company has been wound up. The cashflow model we created for Roger and Carol gave them confidence that they have enough income and capital to fund their lifestyle in retirement.

The EIS investment attracted a 30% tax relief (£180,000) and the Seed EIS investment attracted 50% tax relief.

This tax relief meant that we saved Roger £205,000, as his annual income tax bill of £211,738 was reduced to just £6,738 the next year.

Roger has potential to benefit from 100% inheritance tax relief, as long as he holds the EIS investments for more than two years and retains them at the time of his death.

Provided Roger and Carol live for seven or more years, the value of their discretionary trusts will be outside of their estate. Based on the initial investment amounts into the Seed EIS and discretionary trusts, Roger and Carol could save £420,000 in inheritance tax (assuming the current tax rate of 40%).