Investment optimisation
Background
| Client: | Retired female aged 78 in good health (widow) |
| Assets: | House | £350,000 |
| Property Share | £530,000 |
| Share Portfolio | £150,000 |
Requirement
The client is aware of potential IHT and would like to address the issue. However, she would like to draw an income in her lifetime and pass the capital to her children in the most tax efficient manner. At the initial meeting, she thought she was getting quite a good income from her share portfolio. On further investigation, she was actually only getting 3% as some shares were not producing dividends. Also, she was taking considerably more risk than she wished, which we had identified as three out of ten (low). Clearly, there was a need to consolidate her share portfolio to match her risk profile, ensure sufficient income was being generated and make it tax-efficient.
Recommendations
We recommended that the client take out a discounted gift scheme on a full initial under-writing basis. This achieved an immediate reduction on her estate of £65,782.88 with a further £84,217.12 after seven years. This gave an initial saving of £26,313.15 in IHT and a further £33,686.85 after seven years.
In addition, we established that there would be a CGT liability of £10,925.46 if the client were to cash in her share portfolio. We decided to straddle the encashments over two tax years so as to use two annual CGT allowances to absorb the CGT.
The investment portfolio was constructed in line with her newly assessed risk rating to produce an income of 5% per annum. The investment portfolio has been delivering 9.5% yield per annum over the last two years, which means that even after income, the portfolio is still growing at 4.5% per annum.
Before
| Share Portfolio | | Income |
| £150,000 | | £4,500 per annum |
£150,000 assessable to IHT at 40%. Investment portfolio is high risk. Low and unstable income. Compounding CGT liability. Complicated income for tax return.
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After
| Investment Portfolio | Income | |
| £150,000 | £7,500 per annum | |
Immediate IHT saving of £26,313.15 and a further £33,686.85 after seven years. Investment portfolio is aligned with client’s attitude to risk. Higher and more stable income. No CGT implications. More simple and consolidated income for tax return.
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