Inheritance Tax & Retirement Planning
Brian and Sally had recently retired but were looking for financial help. Not only did they have a sizeable inheritance tax liability, but they also wanted to formulate a strategy for generating income.
Brian and Sally are both aged 67 and have recently retired. Brian is an experienced businessman who has successfully exited from a number of companies over the last 10 years, generating sizeable wealth in the process.
Brian and Sally hold significant assets including properties, pension funds and cash. Brian is unable to make further contributions to a UK pension due to lifetime allowance constraints. We had advised Brian to secure his pension lifetime allowance at £1.5m a few years prior.
Brian and Sally wanted to formulate a strategy for generating income in retirement to make provisions for future care fees.
They had a sizeable inheritance tax liability, so wished to explore ways in which they could mitigate or reduce this.
As part of a joint venture with other family members, they were exploring the possibility of acquiring an existing holiday letting business. They wanted to understand the most tax-efficient way of achieving this.
We analysed Brian’s existing pension provision. Whilst the value of his funds was in excess of £1 million, this was insufficient to deliver the desired level of retirement income. There was a clear need to make additional pension contributions. However, we were restricted by lifetime allowance issues and the fact that Brian has no earned income; traditional UK pension options were not available.
As a result, we made the following recommendations:
- We recommended that Brian established a QNUPS (Qualifying Non-UK Pension) and invested £1.2m, sufficient to make up the identified income shortfall.
- We then discussed how to invest the money that was now sat within the QNUPS. Brian preferred bricks and mortar rather than stock market-based investments. With this in mind, we arranged a £1m loan from the QNUPS to a new limited company, that Brian has set up for the purpose of acquiring the holiday letting business. The loan was secured via a first legal charge on the land.
- Brian was then able to complete the purchase of the holiday letting business with these funds. The limited company makes regular interest payments to Brian’s QNUPS at a fixed rate of 6% per annum. These interest payments can be drawn from the QNUPS as income.
Brian and Sally have formalised their retirement income and are now able to draw a sustainable income from Brian’s SIPP and QNUPS Pension.
The loan is a debt to the QNUPS, and therefore a debt against their estate, which reduces their IHT liability by £480,000. The limited company has to pay interest on the loan which reduces corporation tax liabilities.
There is no tax payable within the QNUPS on the interest payments. Assets held within a QNUPS also grow free of Capital Gains and Inheritance Tax. Brian only pays tax when he draws income directly from the QNUPS.