Karim

When Karim, 57, sold his business he received a significant lump sum payment and an ‘earn out’ that reflected the performance of the business over five years. While still involved in the business in an advisory capacity for up to two years, Karim and his wife wanted to devote most of their time to their three young children, travel and philanthropy.

The couple planned to make large gifts to their children and charity, but faced uncertain cash flow and tax liabilities during the ‘earn out’ period after the sale. They also wanted the flexibility to adapt their lifestyle as they wished. The family came to us looking for advice on how best to proceed.

One drawback of selling the business was that the family lost the benefit of ‘business relief’. This reduces the inheritance tax (IHT) on some assets when passing them on to the next generation. Karim was keen to find a way to replace this with a suitable IHT planning strategy.

IHT planning can take time to become effective.

The solutions we offered the family included:

– A long-term financial plan

– A flexible, multi-asset investment approach

– Succession and inheritance tax planning

– Philanthropic support

Working closely with tax advisers, a family investment company was chosen as the central holding structure to meet their long-term needs. Its shareholder structure allowed the children to become part-owners of the family assets, without any unwanted responsibilities. Karim and his wife maintained control of the assets as company directors.

We then recommended investments that qualify for replacement ‘business relief’, to preserve a tax benefit. Effective IHT planning can take time, so we advised Karim to take out life cover. We arranged a policy that would contribute towards any potential inheritance tax liability that is not covered by liquid assets. This gave Karim and his family comfort that any potential IHT bill would not require selling their property. We used cash flow modelling to help the family decide on how to structure gifts to their children and charities over the next few years. This involved using trusts.

Finally, we helped the family accelerate their charitable giving with a Donor Advised Fund. This allowed the family to make a large donation while benefitting from tax relief. Karim hopes it will encourage his children’s interest in philanthropy and help them to appreciate the value and responsibility of wealth.