Wealth Advice

Understanding Clients’ Needs and Priorities

The clients, Mr and Mrs, have received £12m from a family private equity investment. These funds were paid in the 2017/18 tax year. It is anticipated that there will be further distributions of between £10m - £12.5m over the next 5 years, but this is not guaranteed. These funds have been paid to Mrs Client, who does not otherwise work. Mr Client is employed in a property business, unconnected to the private equity company, and he intends to remain working for the next eight or so years, as there are particular projects he wants to see through to completion. He receives a salary of £500,000 per annum and is expecting a bonus in the region of £2 - £2.5m for the next couple of years but is unsure of his bonus after that. The family have estimated living expenses of £250,000 net per annum, which includes mortgage repayments and school fees for their three minor children.

Mr Client has pension funds valued at £726,000 held within a SIPP. He has applied for Fixed Protection (2016) and so cannot make any further pension contributions. Frances has no pension.

Their main home in Surrey is valued at £3m and they own a second property in Cornwall, which they currently let. They will stop renting out this property and will use it themselves once the redevelopment of their holiday home begins. This holiday home is currently valued at £2m. Both properties are owned in their joint names.

Both Mr Client and Mrs Client have written wills but these predate the birth of their youngest daughter.

Planned Expenditures and Priorities

Mr and Mrs Client expect to invest £1.5m in developing their holiday home in Cornwall over one to three years and plan to repay mortgages on their main home and holiday home, together £1.8m of borrowing. The interest rate on these loans is very low and so rather than repaying mortgages from capital at this stage, they prefer to repay with regular repayments and from Mr Client’s annual bonuses when received. Ideally, they would also meet the costs of the property redevelopment from these bonuses, if possible. This expenditure will be spread across the three years of the rebuilding project. Tax efficient investment for the medium to longer term, with a strategy for the sustainable extraction of funds to meet their annual expenditure once Stephen stops working. Mr and Mrs Client are concerned about their growing IHT liability and would like to consider what options are available to them to begin to plan for this.

  • We have set aside liquidity to meet the tax liability in Mrs Client’s name (due January 2020), which their Accountant has assessed at £4.2m. These funds are held on a fixed term deposit in Mrs Client’s name, with a maturity date of mid January 2020. We have also retained £500,000 in liquidity as an emergency fund.
  • We have undertaken a cash flow analysis, showing expected inflows and outflows taking account of school fees, expected university costs, property refurbishment costs and the repayment of the mortgages. This provides comfort about the sum of money that can be invested now, for the medium to long term.
  • Working collaboratively with the clients’ tax and legal advisers we have established the following tax efficient investment structures:-

    • £2m has been invested in an ‘unwrapped portfolio’, with underlying investments focused on capital growth. This portfolio is owned jointly. We will annually fund ISAs from this portfolio. Mr & Mrs Client have some existing ISAs which we have transferred into the new ISA portfolios, so that all these funds will be managed cohesively. Once their children reach the age of eighteen we will establish and fund ISAs in their names too. These portfolios will ensure that each family member’s capital gains tax allowance is used each tax year.
    • £2m has been jointly invested in an Offshore Investment bond, where the funds can benefit from gross investment roll-up. This wrapper allows the clients to time any chargeable gain arising on the extraction of funds from the bond to suit their time frame and other tax liabilities. They plan to assign segments of the bond to their children once each reaches the age of eighteen, to meet their university costs. In later years, they may also use this vehicle to gift larger sums to their children, for example for property deposits.
    • £1m has been set aside for investment into EIS and VCTs over the next few years. In tax year 2018/19 we are investing a maximum of £250,000 for each of Mr and Mrs Client, and in this year this is into EIS funds where we can carry back the relief to the 2017/18 tax year. We expect to establish a rolling programme of EIS and or VCT funding for Stephen, as he will have a significant ongoing income tax liability for the next eight years.
    • £1m has funded a Family Investment Company. This has been set up on the advice of the clients’ accountants and the company has been capitalised with loans from both Mr and Mrs Client. Each has the option of extracting funds in the form of a loan repayment, if necessary. The equity in the company is issued in several classes of share: Mr and Mrs Client own a class of share that pays dividends. A further class of dividend-paying shares has been issued to their children, who also own a ‘growth’ share class. This structure provides a tax-efficient vehicle for the children, as all capital growth in the portfolio accrues immediately to them. Mr and Mrs Client hope not to need to withdraw any of the capital they have lent to the company. But until Stephen has greater clarity on future bonuses and distributions from Frances’ private equity investment, they do not want to give away any assets. Investments within this company are focused on UK equities.
  • Pension. Mr Client has a pension adviser through his property employment. We have advised him to review his expression of wishes on his SIPP to ensure that he has listed his children as potential beneficiaries alongside his wife.

  • Protection. We are establishing a ‘whole of life’ life insurance policy written as joint lives and payable on the second of them to die. We have agreed a sum assured of £5mm and this policy will be written into trust.
  • Wills and power of attorney. We have advised Mr and Mrs Client to update their wills and establish powers of attorney, as a matter of urgency.

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