Tax & IHT guidance - Intelligent Money Private Clients
Discussion
rfisher said:
Carbon Sasquatch said:
There may also be an IHT claw back, like there is for gifts, if there is a large & late pension contribution ?
You mean the 7 year rule?It would be good to know if that's correct, or if you can dump a large amount into a SIPP and then die shortly afterwards without any specific penalty being incurred as a result.
It is likely to fall foul of the "gratuitous benefit" rule and in this case be assessed as an action taken solely to avoid IHT rather than to increase pension benefits. If this is the case it is added back into the estate.
From a pension perspective, a gratuitous benefit is viewed to take place when a transfer or payment is made resulting in greater death benefits being received by an individual who may not have previously received them if the transfer or payment had not occurred.
This is typically applied if the individual is ill at the time of the transfer/payment and then dies within 2 years of the transaction but these are general guidelines not hard set rules.
It means that HMRC have an opening that they could use to challenge the IHT position on the payment,
You would also struggle to find a provider that will accept the contribution, part of the trustees duties to monitor contributions and check that they do not exceed the annual allowance.
Cheers
Nik
TeeRev said:
A question for Nik at Intelligent Money, apologies for the long windedness but I think that the more information you have the easier your job might be.
Background information, People.
Me: Retired, (still do a bit of Building Project Management for friends), aged 72, reasonably good health, hoping to make it to around 80. Wife: Retired aged 70, very good health with a long-life expectancy, will probably get to around 90 as her mother made 89 and grandmother 95.
One daughter, married, aged 41, works as a VA Flight Attendant.
Two grand-daughter’s, one aged nearly 11 & one aged 7.
Background information, Property.
My wife and I built and own our Penthouse flat outright,(a thread was in the Homes section3-4 years ago), value approx. 675k. We also own two rental flats outright with a combined value of approx. 425K.
I have a one third share in a 3 way family bare trust which I manage, this trust owns a small portfolio of rental flats and shops with a gross income of around 56K and a gross value of approx 800K less loans, (mainly to me) of approx 130K leaving a net value of approx 670K.
Background information, Financial.
My wife and I have a gross combined income of approx. 62K, comprising of both our govt pensions & my private pension, the income from our two rental flats as well as my share of the rental income, my trust management fees and the interest and loan repayments from the family bare trust. We currently have 100K invested in Premium Bonds and approx 50k in easy access bank accounts.
To make sure we have enough ready cash I have recently taken out a 25K bank loan at 3.9% to be repaid at £458.53 per month over the next five years, I also have approx 15K outstanding on two interest free credit cards to be repaid or rolled over in around 8/12 months.
The Deal.
My sister died last year, and her Son is the Executor of her Estate, which she left to be split five ways, one part to each of her four children and one part to be shared equally between her 14 grandchildren.
My Nephew has sensibly managed to get them all to agree to sell her one third share of the family bare trust to me for what I consider to be the reasonable sum of 110K, they have nowhere else to go with it under the terms of my father’s will and the income of around 10K per year once divided up would be of very little consequence to most of them.
The Plan.
To fund the purchase my wife and I had considered taking out a mortage on our Penthouse or on one of our rental flats but with the recent rise in interest rates we have decided to cash in our 100K Premium Bonds investment instead as the return from that is relatively small, the additional 10K and any fees will come from current accounts.
Our problem is how do we best set up this purchase with consideration to provide the best income for ourselves as well as to help alleviate future inheritance tax issues for our daughter and granddaughters, we have discussed this with our accountant and as I see it, we have several options.
The simple one is to just buy it in mine or my wifes name and let the inheritance tax become our daughter’s problem after we are both gone, we have a 100K last death insurance policy in place to help her with that.
Set up a trust and inject the money to buy it but our accountant advises that trusts are not something governments are very keen on and the amount we are talking about is relatively small for a trust with the costs involved, also it may not be very tax efficient in the short term.
Set up and loan the money to a Family Investment Company with myself and my wife as A shareholders and our daughter and granddaughters as B shareholders, my wife and I would have control and get most of the income back out by way of loan repayments/interest, the others would benefit long term from the value being fixed for inheritance tax purposes.
I have also considered also transferring my share of the trust to the FIC right now but that would incur a large CG tax bill so I will leave it to my wife, she then should be able to transfer it in after I die with no CG tax.
My long-term plan is that after my wife and I are both gone our daughter can borrow against the two thirds of the family property owned by the FIC to buy the share of the trust owned by my other nephew.
The Family Investment Company is our accountants preferred option and I see no other realistic alternative, but my wife is not entirely convinced and would like to hear another unbiased opinion along with suggestions for any other options.
As always pistonheads is the font of all knowledge and you guys seem to know what you’re talking about so here I am. Please note that I would be happy to pay for a more private thorough assessment and detailed advice if required.
Hi TeeRevBackground information, People.
Me: Retired, (still do a bit of Building Project Management for friends), aged 72, reasonably good health, hoping to make it to around 80. Wife: Retired aged 70, very good health with a long-life expectancy, will probably get to around 90 as her mother made 89 and grandmother 95.
One daughter, married, aged 41, works as a VA Flight Attendant.
Two grand-daughter’s, one aged nearly 11 & one aged 7.
Background information, Property.
My wife and I built and own our Penthouse flat outright,(a thread was in the Homes section3-4 years ago), value approx. 675k. We also own two rental flats outright with a combined value of approx. 425K.
I have a one third share in a 3 way family bare trust which I manage, this trust owns a small portfolio of rental flats and shops with a gross income of around 56K and a gross value of approx 800K less loans, (mainly to me) of approx 130K leaving a net value of approx 670K.
Background information, Financial.
My wife and I have a gross combined income of approx. 62K, comprising of both our govt pensions & my private pension, the income from our two rental flats as well as my share of the rental income, my trust management fees and the interest and loan repayments from the family bare trust. We currently have 100K invested in Premium Bonds and approx 50k in easy access bank accounts.
To make sure we have enough ready cash I have recently taken out a 25K bank loan at 3.9% to be repaid at £458.53 per month over the next five years, I also have approx 15K outstanding on two interest free credit cards to be repaid or rolled over in around 8/12 months.
The Deal.
My sister died last year, and her Son is the Executor of her Estate, which she left to be split five ways, one part to each of her four children and one part to be shared equally between her 14 grandchildren.
My Nephew has sensibly managed to get them all to agree to sell her one third share of the family bare trust to me for what I consider to be the reasonable sum of 110K, they have nowhere else to go with it under the terms of my father’s will and the income of around 10K per year once divided up would be of very little consequence to most of them.
The Plan.
To fund the purchase my wife and I had considered taking out a mortage on our Penthouse or on one of our rental flats but with the recent rise in interest rates we have decided to cash in our 100K Premium Bonds investment instead as the return from that is relatively small, the additional 10K and any fees will come from current accounts.
Our problem is how do we best set up this purchase with consideration to provide the best income for ourselves as well as to help alleviate future inheritance tax issues for our daughter and granddaughters, we have discussed this with our accountant and as I see it, we have several options.
The simple one is to just buy it in mine or my wifes name and let the inheritance tax become our daughter’s problem after we are both gone, we have a 100K last death insurance policy in place to help her with that.
Set up a trust and inject the money to buy it but our accountant advises that trusts are not something governments are very keen on and the amount we are talking about is relatively small for a trust with the costs involved, also it may not be very tax efficient in the short term.
Set up and loan the money to a Family Investment Company with myself and my wife as A shareholders and our daughter and granddaughters as B shareholders, my wife and I would have control and get most of the income back out by way of loan repayments/interest, the others would benefit long term from the value being fixed for inheritance tax purposes.
I have also considered also transferring my share of the trust to the FIC right now but that would incur a large CG tax bill so I will leave it to my wife, she then should be able to transfer it in after I die with no CG tax.
My long-term plan is that after my wife and I are both gone our daughter can borrow against the two thirds of the family property owned by the FIC to buy the share of the trust owned by my other nephew.
The Family Investment Company is our accountants preferred option and I see no other realistic alternative, but my wife is not entirely convinced and would like to hear another unbiased opinion along with suggestions for any other options.
As always pistonheads is the font of all knowledge and you guys seem to know what you’re talking about so here I am. Please note that I would be happy to pay for a more private thorough assessment and detailed advice if required.
There are a lot of moving parts in this and as with many tax planning issues there are no right and wrong answers and it is about the comprise that works best for you.
To avoid a very long post trying to cover all bases drop me a pm at nik.burrows@intelligentmoney.com and I'll be happy to pick it up with you.
Cheers
Nik
rfisher said:
Another IHT question to ponder;
Mr Blobby downsizes his house and is left with £1mill in his current account.
He buys a Ferrari for £1mill and then (at some point) transfers ownership to his daughter.
She sells the car and uses the money to buy a house and a Ford Fiesta (future classic).
Should Mr Blobby, or his daughter Belinda, expect a knock on the door from HMRC / BiB anytime soon?
Hi fisherMr Blobby downsizes his house and is left with £1mill in his current account.
He buys a Ferrari for £1mill and then (at some point) transfers ownership to his daughter.
She sells the car and uses the money to buy a house and a Ford Fiesta (future classic).
Should Mr Blobby, or his daughter Belinda, expect a knock on the door from HMRC / BiB anytime soon?
Assuming that Mr Blobby fully gifted the car, i.e. did not just transfer it in name only while continuing to drive it and enjoy it himself, then at the point of gifting the 7 year clock starts ticking, The gift is the value of the car at the time of gifting. If death occurs within 7 years a % of the value will be added back into the estate and IHT may be payable. After 7 years it is outside the estate so no IHT is applicable.
Cheers
Nik
Hi Armitage.shanks
I am glad that you have found the thread helpful and thank you for the feedback.
Using your allowance to pass some of the Estate to your daughter gives her earlier access to assets and means that any future growth on it is outside of the Estate from that point forward. This is obviously only a benefit if the asset grows at a rate above any increase in the IHT allowance and assumes that you wife doesn’t need the assets that you would give to your daughter.
Gifting on first death was more frequently used when the IHT allowance died with you, there is less benefit now that any unused allowance is transferred to the surviving spouse.
You also have £175k of residential property allowance so dependent on the value of your home your daughter could receive £1 million of asset before IHT kicks in.
I covered the basics of IHT planning in a previous post, detailed below.
Use of the 7-year rule (PET) or gifting £3k p.a. are often the starting point, this reduces the estate and puts the funds in the hands of the beneficiary, who can then use them to pay any future IHT bill.
Cheers
Nik
IHT is a large area to cover generically but here is a starter for 10!
IHT is an area that has many wrinkles and off shoots but this should set out the basic principles.
In very broad terms IHT is a balance between giving your assets away and maintaining control and benefiting from them.
The more control that you maintain over your assets the less tax efficient the solution is likely to be and if you look to gift and maintain control the more expensive the solution is likely to be.
i.e. if you simply gift the assets and then live 7 years there is no IHT liability so it is very tax efficient and cost effective but you have no control or benefit from the assets you have gifted.
Basic Principles
Beyond gifts between spouses and some additional allowances the assets of an individual’s estate above £325,000 are subject to IHT.
There is a further allowance of £175,000 for property that is passed to Children or Grandchildren.
The main allowances that are available to reduce the value of the estate and any IHT bill are the gifting allowances. These can be broadly spilt into immediate relief and potential relief.
The immediate relief options are limited to :
£3,000 p.a. (you can carry forward an additional years allowance if it wasn’t used)
Gifts of £250 per person, (excluding any individual that you gifted the £3,000 allowance to)
Gifts from regular income that do not affect your standard of living. The rules for this exemption are quite detailed for example, these gifts must be regular i.e. payments into a regular savings plan or life insurance policy.
Potential Relief (Potentially Exempt Transfers)
This relief is available on any gift that is made. The gift becomes exempt from IHT 7 years after it was made. There is a sliding scale of relief given from year 3 to year 7, know as taper relief so if you die between year 3 and 7 there is a reduction in tax payable and after year 7 the gift is exempt from IHT.
Any planning to reduce an IHT liability is based around use of these allowances.
The use of trusts can allow any asset to be gifted without it passing directly to the beneficiary at that time or to split an asset between its current value and any future increase in value. This can be used to “cap” the value at its current level rather than have future increases in value add to any IHT liability.
Broadly speaking if the person gifting the asset into a trust maintains some benefit from the asset then it is unlikely to be efficient on reducing IHT.
It is this area that becomes very dependent on the type of asset to be gifted, the control that the person gifting wants to maintain and their need for any on-going benefit from the asset.
For example if an individual was to gift their property either to another individual or a trust and then continue to live in the property without paying a market agreed rent, on death the property is unlikely to be treated as gifted and included at its full value for IHT purposes.
The second consideration is to “insure the liability” This involves putting in place a life insurance policy that pays out on death of the individual whose estate you are looking to protect.
If the individual has enough surplus income to meet the “funded from regular income” criteria then the premium can be paid by them and not be treated as a gift.
The policy can be placed in trust so that the benefits do not form part of the estate and on death pay out enough to either fully pay or contribute towards any IHT bill.
This approach doesn’t try to reduce any IHT bill, but provides a means to pay the bill without using the assets form the estate.
Sometimes a combination of both may be used, for example gifts are made to reduce the value of the estate and reduce the potential tax bill.
If these gifts exceed the annually £3,000 allowance, there will still be a tax liability for 7 years after the gifts are made. You can then use a life insurance policy to cover this 7-year period.
In summary you can either make use of gifting allowances and the 7 year Potentially Exempt Transfer rules to bring the value of the estate under £325,000 or insure to cover the bill that you may be subject to.
When using the gifting route, you can make use of trusts to maintain some level of control of the assets without having a beneficial interest or split the current value of the asset from future growth and so prevent any IHT liability from increasing.
I hope this helps. There are several “wrinkles” and offshoots from these main principles that can be applied given individual circumstances and needs
I am glad that you have found the thread helpful and thank you for the feedback.
Using your allowance to pass some of the Estate to your daughter gives her earlier access to assets and means that any future growth on it is outside of the Estate from that point forward. This is obviously only a benefit if the asset grows at a rate above any increase in the IHT allowance and assumes that you wife doesn’t need the assets that you would give to your daughter.
Gifting on first death was more frequently used when the IHT allowance died with you, there is less benefit now that any unused allowance is transferred to the surviving spouse.
You also have £175k of residential property allowance so dependent on the value of your home your daughter could receive £1 million of asset before IHT kicks in.
I covered the basics of IHT planning in a previous post, detailed below.
Use of the 7-year rule (PET) or gifting £3k p.a. are often the starting point, this reduces the estate and puts the funds in the hands of the beneficiary, who can then use them to pay any future IHT bill.
Cheers
Nik
IHT is a large area to cover generically but here is a starter for 10!
IHT is an area that has many wrinkles and off shoots but this should set out the basic principles.
In very broad terms IHT is a balance between giving your assets away and maintaining control and benefiting from them.
The more control that you maintain over your assets the less tax efficient the solution is likely to be and if you look to gift and maintain control the more expensive the solution is likely to be.
i.e. if you simply gift the assets and then live 7 years there is no IHT liability so it is very tax efficient and cost effective but you have no control or benefit from the assets you have gifted.
Basic Principles
Beyond gifts between spouses and some additional allowances the assets of an individual’s estate above £325,000 are subject to IHT.
There is a further allowance of £175,000 for property that is passed to Children or Grandchildren.
The main allowances that are available to reduce the value of the estate and any IHT bill are the gifting allowances. These can be broadly spilt into immediate relief and potential relief.
The immediate relief options are limited to :
£3,000 p.a. (you can carry forward an additional years allowance if it wasn’t used)
Gifts of £250 per person, (excluding any individual that you gifted the £3,000 allowance to)
Gifts from regular income that do not affect your standard of living. The rules for this exemption are quite detailed for example, these gifts must be regular i.e. payments into a regular savings plan or life insurance policy.
Potential Relief (Potentially Exempt Transfers)
This relief is available on any gift that is made. The gift becomes exempt from IHT 7 years after it was made. There is a sliding scale of relief given from year 3 to year 7, know as taper relief so if you die between year 3 and 7 there is a reduction in tax payable and after year 7 the gift is exempt from IHT.
Any planning to reduce an IHT liability is based around use of these allowances.
The use of trusts can allow any asset to be gifted without it passing directly to the beneficiary at that time or to split an asset between its current value and any future increase in value. This can be used to “cap” the value at its current level rather than have future increases in value add to any IHT liability.
Broadly speaking if the person gifting the asset into a trust maintains some benefit from the asset then it is unlikely to be efficient on reducing IHT.
It is this area that becomes very dependent on the type of asset to be gifted, the control that the person gifting wants to maintain and their need for any on-going benefit from the asset.
For example if an individual was to gift their property either to another individual or a trust and then continue to live in the property without paying a market agreed rent, on death the property is unlikely to be treated as gifted and included at its full value for IHT purposes.
The second consideration is to “insure the liability” This involves putting in place a life insurance policy that pays out on death of the individual whose estate you are looking to protect.
If the individual has enough surplus income to meet the “funded from regular income” criteria then the premium can be paid by them and not be treated as a gift.
The policy can be placed in trust so that the benefits do not form part of the estate and on death pay out enough to either fully pay or contribute towards any IHT bill.
This approach doesn’t try to reduce any IHT bill, but provides a means to pay the bill without using the assets form the estate.
Sometimes a combination of both may be used, for example gifts are made to reduce the value of the estate and reduce the potential tax bill.
If these gifts exceed the annually £3,000 allowance, there will still be a tax liability for 7 years after the gifts are made. You can then use a life insurance policy to cover this 7-year period.
In summary you can either make use of gifting allowances and the 7 year Potentially Exempt Transfer rules to bring the value of the estate under £325,000 or insure to cover the bill that you may be subject to.
When using the gifting route, you can make use of trusts to maintain some level of control of the assets without having a beneficial interest or split the current value of the asset from future growth and so prevent any IHT liability from increasing.
I hope this helps. There are several “wrinkles” and offshoots from these main principles that can be applied given individual circumstances and needs
oldaudi said:
Morning,
I can’t find any proper answers on Google and I don’t have a personal tax advisor. I’m PAYE although I do my own tax returns because I pay into a SIPP and I chase the extra tax relief.
As some of you may know my wife died in 2021. I’m still sorting through her pensions , mainly due to the complete incompetence of the two ex-employers I’ve been dealing with. Both related to local councils and governments.
I seem to be almost there but my question is regarding monthly tax payments for children on an inherited pension. There was one lump sum which should be coming to me tax free because it’s classed as out of her estate, but I’ve managed to get this to swerve me completely and get paid to my children’s existing in trust stocks and shares accounts with Hargreaves Lansdown. I didn’t want it to be part of my estate or be classed as a gift to the children. We will see if that really happens later this week.
Alongside this I and the two children will receive a monthly payment. The paperwork was received this morning, mine appears to be taxed which is correct. But theirs is showing a tax deduction too. Should they be paying tax? One is 16 and in full time education at college, the other is 13. I’ve been receiving another monthly pension from one of her other employers for over a year and that’s taxed too.
I want to correct it but also fear the length of time this will take given the slowness of the department’s I’m dealing with.
It’s a not huge numbers, but does show a tax deduction. Is that correct? Thank you
Hi OldaudiI can’t find any proper answers on Google and I don’t have a personal tax advisor. I’m PAYE although I do my own tax returns because I pay into a SIPP and I chase the extra tax relief.
As some of you may know my wife died in 2021. I’m still sorting through her pensions , mainly due to the complete incompetence of the two ex-employers I’ve been dealing with. Both related to local councils and governments.
I seem to be almost there but my question is regarding monthly tax payments for children on an inherited pension. There was one lump sum which should be coming to me tax free because it’s classed as out of her estate, but I’ve managed to get this to swerve me completely and get paid to my children’s existing in trust stocks and shares accounts with Hargreaves Lansdown. I didn’t want it to be part of my estate or be classed as a gift to the children. We will see if that really happens later this week.
Alongside this I and the two children will receive a monthly payment. The paperwork was received this morning, mine appears to be taxed which is correct. But theirs is showing a tax deduction too. Should they be paying tax? One is 16 and in full time education at college, the other is 13. I’ve been receiving another monthly pension from one of her other employers for over a year and that’s taxed too.
I want to correct it but also fear the length of time this will take given the slowness of the department’s I’m dealing with.
It’s a not huge numbers, but does show a tax deduction. Is that correct? Thank you
It is likely to depend on the structure of the payment. From your post is sounds like the payment is from a Defined Benefit scheme and is a dependents pension payment.
This is often enhanced where there are children as well as the a spouse/partner.
If the payment is made to the spouse/partner including the enhancement to support the children then it will taxed as income at the marginal rate for the spouse/partner
If the additional payments for the children are being made directly to the children then it will be taxed as income at their marginal rate. They have a personal allowance £12,570 so the first £12,570 of income should be available tax free. The scheme admin should be able to arrange to pay this gross if the annual income from the scheme is below £12,570 p.a.
Cheers
Nik
jimmybell said:
I guess something i hadn't considered is my wife's allowance. She's a 20% taxpayer but even that i guess would be preferable to ISA.. so the ordering becomes:
fill my pension allowance, fill my wife's pension allowance, then my ISA until limits, then hers, then GIA.
Jimmybellfill my pension allowance, fill my wife's pension allowance, then my ISA until limits, then hers, then GIA.
Filling both pensions also means that you make use of two income tax allowances when you come to draw the benefits.
Cheers
Nik
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