Dear Archibald Horatio Landrover Horniman, 13th Duke of Halstead,
It was a pleasure to meet you and to see your beautiful country estate. Your chickens in particular are magnificent.
As you know, the purpose of my trip was to give you some estate planning advice. You mentioned to me that your existing lawyer had warned you about the pitfalls of capital gains tax, but what I don’t think he‘s appreciated is that the value of your assets will be re-based at the date of your death. Inheritance tax is likely to cause your executors a bigger headache, I’m afraid.
While I don’t have the exact details of the current value of your estate, I do know that Badminton Estate is estimated to be worth about £300 million, so let’s start with that figure in mind. Broadly speaking, inheritance tax is charged on your assets on death at a rate of 40%, meaning your estate could be looking at an inheritance tax bill of somewhere in the region of £120 million if you don’t undertake some estate planning. Here are a few steps that you might want to consider to reduce your inheritance tax exposure and save Halstead estate from needing to be sold on your death to foot the bill:
Firstly, you simply must prepare a new will! I know that your current will leaves the bulk of your estate to your second son, Edward. I hate to be the one to break it to you, but primogeniture (or “secundogeniture” in this case), particularly when you're married to a wife twenty years your junior, like Lady Sabrina, is not at all tax efficient, old chap. Instead, I suggest your will includes what we in the business refer to as a “flexible life interest trust”, giving an initial right to income in your estate to Lady Sabrina. That way your estate would secure the spouse exemption on your death so that initially there would be no inheritance tax to pay. And what’s even more nifty is that if Lady Sabrina then makes the onward gifts you would like (the Gatekeeper’s Cottage along with its rescued fox to Geoffrey, your yacht to your “daughter” Charlotte, and of course the remainder of your estate, including your title, the wine cellar and the village of Hetherington, to Edward) then if Lady Sabrina survives seven years from the date of the gifts, your estate could potentially end up paying NO INHERITANCE TAX AT ALL. Hurrah!
Of course, there’s no guarantee that Lady Sabrina will survive you by seven years, and so we need a decent back-up plan. You seem an enterprising aristocrat, so might I suggest you focus your “business activities” more effectively? Business relief is a valuable inheritance tax relief that applies to an interest in a trading business, subject to certain qualifications, one, of course, is that it’s a LEGAL trading business, and another that you don’t have too much surplus cash on the books (might want to re-evaluate the contents of your safe… nudge nudge wink wink). You also own a yogurt farm and dairy, which is music to a private client lawyer’s ears as agricultural relief could apply to your farming assets. Where business or agricultural relief apply in full, there will be no inheritance tax to pay on those assets - great stuff.
Consider trust planning. You can transfer any assets you’re currently holding that qualify for agricultural or business relief into trust along with assets up to the value of your available nil rate band without giving rise to an immediate inheritance tax charge. Provided that you don’t continue to benefit personally from the assets transferred into trust, then after seven years the value will be removed from your estate. You can claim hold-over relief for capital gains tax at the same time. Double win!
Trust planning would also be useful in relation to your eldest son Freddy. I know you have plans to disinherit him but the impression I got is that he is rather hopeless with money and is most definitely financially dependent on you. Unfortunately, this brings him within the class of beneficiaries who could bring a claim against your estate on your death for “such financial provision as would be reasonable for his maintenance.” If Freddy is a beneficiary of the trusts (or indeed a beneficiary of your will trust) then the trustees can control the benefit he receives from your estate, which I’m sure would be a big relief. I’d stay away from appointing “Sticky Pete” as a trustee though if I were you, he doesn’t appear to have good business acumen.
For any assets you own that don’t qualify for relief, we could look at setting up a Family Investment Company. We have a number of specialists in that area and the great thing about Family Investment Companies is that they offer the same opportunities for control as trusts, but you aren’t limited to the initial value you give away in the same way as you are with trusts. I’d be happy to give you some further advice on Family Investment Companies if you wish (I’d stay away from horticultural investments though as I wouldn’t like you to get your hands dirty).
In the event that we don’t completely manage to eliminate your inheritance tax liability by this planning, then fear not! HMRC offer an inheritance tax “acceptance in lieu” scheme allowing your executors the ability to donate items of cultural heritage and national significance for public enjoyment in return for substantial inheritance tax savings. Your Thomas Gainsborough “Conrad Wood” (1748) is, I believe, valued in the region of £8,400,000 and would be perfect for this.
On this occasion I’d be happy to waive the fee for the will drafting and inheritance tax advice in exchange for a case of your D-R Conti 82. I hear that it’s £20,000 a bottle, but if you weigh that up against the inheritance tax, I’ll be saving you; it’s quite the bargain.
Finally, I hate to disappoint you, but in case you had grand plans for a “reading of the will” following your death, that only happens in films I’m afraid. Hopefully, the inheritance tax reduction off the back of this advice will soften the blow on that front.
Anyway, must dash. Look after yourself, you wouldn’t want a nasty fall.
Yours Sincerely,
Alison Chaloner
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