Two of our clients, a married couple in their 70s and 80s, mentioned that their son was looking to purchase a boat. The son also wanted to help his two children get on the property ladder in London.
The father had previously owned a boat and vividly remembered all the happy memories he had created on it, and he wanted his son to experience the same joy. Rather than just get a boat he could afford, he wanted his son to be able to get a boat he really wanted.
The clients’ Equilibrium team consists of two Chartered Financial Planners, Andrew Hirst who is their dedicated financial planner and Richard Higgs who acts as their dedicated client manager.
The couple had established four trusts over the years to benefit all their children, so Andrew and Richard explained that they could allocate one trust to their son which had a value broadly in line with his entitlement from all trusts.
His entitlement from the four trusts was £173k, with the allocated trust valued at £155k – representing the majority of his entitlement.
An onshore investment bond is held within the trust. So, Equilibrium reviewed the tax position:
| Current Value | £155,319 |
| Surrender penalty | £0 |
| Surrender value | £155,319 |
| Total withdrawals | £1,869 |
| Surrender value plus withdrawals | £157,188 |
| Total amount invested | £115,000 |
| Chargeable gain | £42,188 |
| Number of years held | 7 years |
| Top sliced gain | £6,027 |
This showed that the initial investment of £115,000 (which, with regard to inheritance tax, is outside of the clients’ estate as it had been over seven years) had grown to £157,188 (with all growth achieved also outside of their estate!)
Due to the top slicing advantages of investment bonds, the bond could be surrendered, and proceeds raised free of tax, providing the £6,027 falls within the bond holder’s basic rate income tax band.
Surrendering within the trust itself is not tax efficient. We also didn’t want to assign the bond directly to the son as he is a higher rate taxpayer and therefore any bond surrender would have incurred tax (of circa £8,400). We therefore engaged with the son’s wife, who had recently retired and had no taxable income for the tax year.
We assigned the investment bond to her and fully surrendered this in her name. The top sliced gain was then added to her total income and, as this remained within her basic rate tax band, no tax was payable on the surrender.
This allowed the funds, £155,460 to be raised free of any additional tax!
With a little thought and engagement from the family, our clients were able to help their son achieve a dream he didn’t realise he could and create lifelong memories.
We are pleased to say that our clients’ son has since had an offer accepted on a boat in Spain, so it should be plain sailing from here.
Disclaimer: The content contained in this blog represents represents the opinions of Equilibrium Investment Management LLP (EIM) and Equilibrium Financial Planning LLP (EFP). The commentary in no way constitutes a solicitation of investment advice. It should not be relied upon in making investment decisions and is intended solely for the entertainment of the viewer. Past performance is never a guide to future performance. Investments may (will) fall as well as rise and you may not get back your original investment.