Yellowtail Blog

A client (a lady of over 80 years) recently sold a house and deposited rather a lot of money in her Barclays account. On her next visit to her branch she was approached by their financial adviser and she expressed concern about inheritance tax. He then explained how she could make a £200,000 gift into an insurance bond, thus reducing her estate by £200,000 whilst allowing her to retain the income. This sounded too good to be true, she was interested.

Following the meeting she received a large pack through the post with details of such a bond from AXA, the insurance company. Not understanding a thing the brochure was saying she finally called me for my opinion. I was scratching my head wondering how to immediately pass £200,000 out of the estate, give her access to the income, and be tax efficient from an inheritance tax position. Unable to come up with the answer I asked to see the documents.

OK, let’s cut to the chase here, it doesn’t work as described. The bond is a “Discounted Gift Scheme” and at her age if she were to make this £200,000 there would be a “discount” of slightly more than £72,000. In inheritance tax terms the saving would be nearly £30,000.

Leaving aside whether this would work or not I was struck by three things, the complexity of the charging structure, and the amount of commission that Barclays were going to take, and the effect of charges over the life of the investment.

Let’s deal with the commission first. Twelve Grand! So you walk into a branch, have a quick chat, perhaps followed by another quick chat, sign the paperwork and they sting you for £12,000! Is this simply daylight robbery? Compared to our charges it is.

Next, the charging structure. There are seven, yes seven different charging structures for this bond, none of which I could fully understand. It seemed to me however that our client would be faced with an “establishment charge of 0.625% of the original investment amount for each quarter over the first five years which amounts to a whopping 12.5% or one eighth of your investment wiped out in establishment charges, not to mention the ongoing annual management charges.

This doesn’t seem to be good inheritance tax planning to me, you’re either paying the government or you’re paying AXA and Barclays. With a bit of planning and some fee based advice we can achieve a better result at a fraction of the cost – result, less tax to pay and more money in the hands of the beneficiaries.