Do you know which type of investment would best suit your individual situation? Knowing the risk, rewards and tax implications of certain investments is the best way to ensure you make the right decision for your circumstances and the safest way to protect your finances. The case study below demonstrates how AEON was able to advise and assist one client with their investment requirements.


Case Study

The problem: Paying tax unnecessarily on your investments
The benefit: Mitigating Inheritance Tax, reducing income tax and reduced investment risk
Suitable for: Those receiving an inheritance within the last two years.
Those wanting to reduce Inheritance Tax liabilities.

Here is a classic case where minimising the effect of tax allowed an investor to take less risk.

Sylvia, an 81 year old client, originally inherited £140,000 from her uncle via his will. In discussion with AEON, Sylvia confirmed that she did not require the use of this capital or the income it might yield, because her needs were being adequately met from her existing income and capital reserves. Sylvia already had assets of £325,000 which meant that any further inheritance would take her over the ‘nil rate band’ for inheritance tax purposes. Her will left everything to her seven nephews and nieces which would have meant that the £140,000 she had inherited would have been taxed on her death, a cost to her estate of £56,000 in inheritance tax. Sylvia wanted to invest the money because she was keen for it to grow. She also wanted to keep control of the money while she was alive, but did not want to risk losing the capital either to the taxman or through investment risk.

Solution:

A special deed was drafted that subsequently created a Trust. The trustees then purchased an investment that would not be taxed as it grew in the Trust. Sylvia wanted no risk for the investment so the trustees purchased capital guaranteed investments. Sylvia was a beneficiary of the Trust and also a trustee, thereby retaining her control of the assets and also giving her access to it should this be necessary.

When Sylvia died three years later, the Trust was wound up and the assets distributed to her seven beneficiaries. She had died early in the tax year so the Trust was wound up in the same tax year and the Trust assets were not subject to the rate of tax applicable to trusts (50%), nor to Inheritance Tax (40%). Instead, her full income tax allowance was used to offset the majority of the tax due.

When the Trust was wound up it yielded £164,371 which was a good return for just 3 years! At a tax rate of 1.5%, the tax paid came to just £2,471. The bottom line is that the beneficiaries received £161,900 after tax, rather than the £84,000 they would have received if Sylvia had not taken advice from AEON.