Case Study: A long term relationship pays dividends

Our clients, a farming husband and wife partnership, have been long standing accounting clients of Armstrong Watson. Over the last few years they have been reducing their farming business taking the opportunity to sell land. Two years ago our Financial Planning Consultant, together with a Tax Consultant, were introduced to advise on potential capital gains and inheritance tax issues because some of the land had development potential.

Farming will always be part of their life, however, they also remember the struggles of the 1980/90’s including the foot and mouth outbreak back in 2001, so the opportunity to secure the financial future of their family was a key consideration for them at this stage of their lives.  

We established assets totalling close to £2m in cash, investments, their home and farm land. Their investment portfolio was varied and which they said they found confusing due to the different tax rules of ISA’s, General Investment Accounts and Investment Bonds, recommended at different times by previous financial advisers.  

We agreed their key objectives were:

1. Reduce/mitigate Capital Gains Tax if any land was sold.
2. Protect the proceeds of any potential sale from Inheritance Tax (IHT).
3. Provide additional Inheritance tax recommendations.  
4. Review and simplify their investment strategy.

These objectives are complex and far reaching, so the advice was broken into separate elements with the first two needing to be addressed before the others.

Land Sale

They each had a personal pension, however, these were old contracts not allowing commercial investments as holdings. I advised switching their existing pensions into Self Invested Personal Pensions (SIPP’s) to facilitate the purchase of the 12 acres of land. The land was purchased originally for around £100,000 and sold to the SIPP’s for £300,000. This created a capital gains tax charge for each client on the profits made, however, the good news was, now that the land was in the SIPP’s it is no longer subject to future capital gains tax and future inheritance tax. As the clients also had enough income to live from their State Pensions they did not need to make withdrawals from these SIPP’s.

Fast forward two years and the land is sold for development at £150,000 per acre. The land was originally bought for £11,000 per acre, and had it been sold personally to the developer it would have had a gain of £139,000 per acre - £1,668,000 in total, with only a combined Capital Gains Tax allowance of £24,600 to offset against this. However, instead they now have a SIPP each with a sum of £900,000 totalling £1.8m and no further capital gains tax to pay as mentioned earlier.

Inheritance tax

We also established that the clients had assets significantly above the IHT threshold. Of those assets a sizeable proportion was in their investment portfolio. They were offered a sum of £400,000 for another plot of land, and were keen to accept because it fitted in with their original objective of securing their family’s future, meaning they had immediate investible assets of close to £1m. By accepting the offer for the land it not only created a capital gains liability because the acquisition price is higher than agricultural value, but it also meant the cash could be subject to IHT (Before sale it would have been likely to benefit from agricultural property relief).

Working alongside our Chartered Tax Consultancy team it was established that the clients had each used some of their £325,000 nil rate band, but still had scope to each make a gift of £200,000 using the land sale proceeds. However, following further discussions, they did not wish to gift the money outright at this time as they feared the ‘what if’ in the event such as needing funds for long term care. They had no need for income though, but they liked the idea of establishing a trust, and as trustees, being involved in the investment decisions. We recommended the use of a ‘flexible reversionary trust’ which after 7 years will see the respective £200,000 + growth outside of their estate for IHT purposes. They also retain the right to revert to capital if needed on the anniversary of the trust each year.

Investment Review

Their existing investment portfolio totalling £430,000 was invested across 13 different investment contracts. The expertise of our asset management business, Future Money and their Fund Manager, Richard Cole, were engaged, to produce detailed analysis of their investments against their objectives, risk tolerance, investment styles and preferences. I then recommended a flexible investment portfolio which matched their objectives and tolerances. An approach with an overarching strategy where investment diversification is achieved but a client receives a simple overall valuation and access to both financial adviser and fund manager, as required, and formal regular ongoing reviews with all parties present.

The overall advice took place over a period of 12-18 months involving various experts across the Armstrong Watson business together with legal professionals. The outcome has seen the clients retain sufficient land to maintain their farming at a level they are more comfortable with, but they have now also been able to take advantage of development land prices, combined with careful financial and tax planning, to secure the long term financial future for both themselves and their family.

Armstrong Watson’s Chartered Accountants and Chartered Independent Financial Advisers can advise on all aspects of business and financial planning needs tailored to each individual circumstance. Our expertise is ”under one roof” allowing our Corporate Tax Advisers and Financial Planners to work alongside each other to ensure business owners get all the advice and support they need. Any advice given under our financial planning service is regulated by the Financial Conduct Authority.