Tax & IHT guidance - Intelligent Money Private Clients

[Groat]

dingg said:

Groat said:

If you put £100k into a GIA and a year later it had become £110k and you took £10k out how much tax would you pay?

Zero, unless you have other capital gains elsewhere, allowance currently 12300

Ok. In my example the GIA had gained 10%. Would all of the 9% taken out be taxable or only 10% of it?

[Mr Pointy]

Groat said:

dingg said:

Groat said:

If you put £100k into a GIA and a year later it had become £110k and you took £10k out how much tax would you pay?

Zero, unless you have other capital gains elsewhere, allowance currently 12300

Ok. In my example the GIA had gained 10%. Would all of the 9% taken out be taxable or only 10% of it?

Just the 10%. What you take out is capital & gain in the appropriate ratio - you can't take out just capital or just gain.

[Groat]

Thanks Mr P

[Mr Pointy]

Groat said:

Thanks Mr P

It makes it a bit of a mare when I was trying to work out how much to realise to maximise the gains while not going over the allowance.

[LeoSayer]

Mr Pointy said:

Groat said:

dingg said:

Groat said:

If you put £100k into a GIA and a year later it had become £110k and you took £10k out how much tax would you pay?

Zero, unless you have other capital gains elsewhere, allowance currently 12300

Ok. In my example the GIA had gained 10%. Would all of the 9% taken out be taxable or only 10% of it?

Just the 10%. What you take out is capital & gain in the appropriate ratio - you can't take out just capital or just gain.

Just to be a pedant, capital gains tax is calculated on the gains you made on shares sale in the tax year. So it's theoretically possible to have to pay CGT in the scenario you above. For example:
- Bought share A for £50k in year 1 and sold it in year 2 for £70k - gain of £20k (ie. above the CGT allowance)
- Bought share B for £50k in year 1 (not sold) and it's worth £40k in year 2

Also, dividend tax may be payable on anything received above £2k.

Also, income tax may be payable if you make a living out of trading.

That's my layman's understanding.

[pingu393]

LeoSayer said:

Just to be a pedant, capital gains tax is calculated on the gains you made on shares sale in the tax year. So it's theoretically possible to have to pay CGT in the scenario you above. For example:
- Bought share A for £50k in year 1 and sold it in year 2 for £70k - gain of £20k (ie. above the CGT allowance)
- Bought share B for £50k in year 1 (not sold) and it's worth £40k in year 2

Also, dividend tax may be payable on anything received above £2k.

Also, income tax may be payable if you make a living out of trading.

That's my layman's understanding.

My understanding is different, in that Share A and Share B are both part of the GIA wrapper, and it is the wrapper that is taxed, not the individual shares inside that wrapper.

So, in your example, £100k was invested in Year 1 and it was worth £110k in Year 2. You withdrew £20k (£18,181 would have been capital and £1,819 would have been gain). As £1,819 is below £12,300, there would be no CGT to pay.

If you were holding the shares outside of a GIA wrapper, you would be correct - but that is not the scenario.

[LeoSayer]

pingu393 said:

My understanding is different, in that Share A and Share B are both part of the GIA wrapper, and it is the wrapper that is taxed, not the individual shares inside that wrapper.

So, in your example, £100k was invested in Year 1 and it was worth £110k in Year 2. You withdrew £20k (£18,181 would have been capital and £1,819 would have been gain). As £1,819 is below £12,300, there would be no CGT to pay.

If you were holding the shares outside of a GIA wrapper, you would be correct - but that is not the scenario.

Every day's a school day

[Mr Pointy]

LeoSayer said:

Mr Pointy said:

Groat said:

dingg said:

Groat said:

If you put £100k into a GIA and a year later it had become £110k and you took £10k out how much tax would you pay?

Zero, unless you have other capital gains elsewhere, allowance currently 12300

Ok. In my example the GIA had gained 10%. Would all of the 9% taken out be taxable or only 10% of it?

Just the 10%. What you take out is capital & gain in the appropriate ratio - you can't take out just capital or just gain.

Just to be a pedant, capital gains tax is calculated on the gains you made on shares sale in the tax year. So it's theoretically possible to have to pay CGT in the scenario you above. For example:
- Bought share A for £50k in year 1 and sold it in year 2 for £70k - gain of £20k (ie. above the CGT allowance)
- Bought share B for £50k in year 1 (not sold) and it's worth £40k in year 2

Also, dividend tax may be payable on anything received above £2k.

Also, income tax may be payable if you make a living out of trading.

That's my layman's understanding.

To be fair I was talking about funds rather than individual shares. As we know there's a whole different set of rules around shares & CGT.

[ParkerTalbot]

Hello

Thank you for your advice in these forums, long term lurker here.

I have a question regarding property and IHT. My parents have been very successful and are in a position where they have a home and a second/holiday home, both in the UK, both owned in the usual/personal way rather than through any sort of company structure.

Each property is worth c £1.5m. Is there any sensible/realistic way to reduce the potential IHT liability here through transfer/gifting/trusts etc? If it makes any difference, I have one sibling.

[Intelligent Money]

ParkerTalbot said:

Hello

Thank you for your advice in these forums, long term lurker here.

I have a question regarding property and IHT. My parents have been very successful and are in a position where they have a home and a second/holiday home, both in the UK, both owned in the usual/personal way rather than through any sort of company structure.

Each property is worth c £1.5m. Is there any sensible/realistic way to reduce the potential IHT liability here through transfer/gifting/trusts etc? If it makes any difference, I have one sibling.

Hi ParkerTalbot

IHT is an area full of wrinkles and grey areas, so a simple answer is often difficult. However trying to keep it simple if they gift a property outright and live for 7 years it will be out of the Estate, there is a sliding scale from years 1-7. Any benefit that they maintain in that property potentially diminishes the efficiency of the gift.

i.e. They gift the main residence to you and your sibling but still live in the property without paying you a market value rent. This is likely to be treated as a gift with reservation and so viewed as having never been gifted at all so will be added back into the Estate on death.
If they gift it to you and you formally rent to them at market rates it is likely to be treated as a gift and outside the Estate.

Trusts are a bit of a mid-ground. They tend to split the ownership of an asset into legal ownership and beneficial ownership. This gives some control via the legal ownership but gifts the value/benefit.
In broad terms the more control you keep the less IHT efficient the trust is and the more your give away the more IHT efficient it is.

Happy to take a look at your position and give you a more detailed overview of things to consider if that would be more helpful. Just drop me a massage at [e-mail].

Cheers

Nik

[ParkerTalbot]

Intelligent Money said:

Hi ParkerTalbot

IHT is an area full of wrinkles and grey areas, so a simple answer is often difficult. However trying to keep it simple if they gift a property outright and live for 7 years it will be out of the Estate, there is a sliding scale from years 1-7. Any benefit that they maintain in that property potentially diminishes the efficiency of the gift.

i.e. They gift the main residence to you and your sibling but still live in the property without paying you a market value rent. This is likely to be treated as a gift with reservation and so viewed as having never been gifted at all so will be added back into the Estate on death.
If they gift it to you and you formally rent to them at market rates it is likely to be treated as a gift and outside the Estate.

Trusts are a bit of a mid-ground. They tend to split the ownership of an asset into legal ownership and beneficial ownership. This gives some control via the legal ownership but gifts the value/benefit.
In broad terms the more control you keep the less IHT efficient the trust is and the more your give away the more IHT efficient it is.

Happy to take a look at your position and give you a more detailed overview of things to consider if that would be more helpful. Just drop me a massage at [e-mail].

Cheers

Nik

Thank you Nik, appreciate the reply. Could the holiday home (not being the primary residence) still be gifted and rented back in the same way? From what I've read this would incur CGT?

If that was allowed, the potential rent could very well likely be a similar amount to the annual council tax and maintenance fund (it's an apartment with communal grounds) that my sibling and I would be paying as the new owners?

Edit to add

If I am correct re 2nd home being liable for CGT as a gift, is the following permissable?

- Nominate 2nd home as primary residence with HMRC
- Gift this home and start paying my sibling and I market rent for the time spent there (c 6 weeks a year)

At what point can the other house (formerly the primary residence) become the primary residence once again so that it qualifies under the £175k per person IHT allowance? OR would this automatically happen because they have, by this point, gifted away what was nominated as their primary residence (formerly the 2nd home) leaving them with 'only' one property?

Edited by ParkerTalbot on Wednesday 8th September 14:28

[Intelligent Money]

ParkerTalbot said:

Thank you Nik, appreciate the reply. Could the holiday home (not being the primary residence) still be gifted and rented back in the same way? From what I've read this would incur CGT?

If that was allowed, the potential rent could very well likely be a similar amount to the annual council tax and maintenance fund (it's an apartment with communal grounds) that my sibling and I would be paying as the new owners?

Edit to add

If I am correct re 2nd home being liable for CGT as a gift, is the following permissable?

- Nominate 2nd home as primary residence with HMRC
- Gift this home and start paying my sibling and I market rent for the time spent there (c 6 weeks a year)

At what point can the other house (formerly the primary residence) become the primary residence once again so that it qualifies under the £175k per person IHT allowance? OR would this automatically happen because they have, by this point, gifted away what was nominated as their primary residence (formerly the 2nd home) leaving them with 'only' one property?

Edited by ParkerTalbot on Wednesday 8th September 14:28

Hi ParkerTalbot,

We are now already well into the wrinkles and greys!!
Gifting of the holiday home while it's viewed as 2nd home would incur CGT based on the market valuation of the property when it was gifted. So IHT efficient but possibly not very CGT efficient!

Nominating a 2nd property as main residence is usually, but not always, done within 2 years of purchase and there are no set criteria for it to qualify. HMRC talk about "quality of residence" rather than set criteria.
It is likely that HMRC may have some questions if it is nominated as main residence and then quickly gifted! They may miss it but if not it could be a difficult conversation!
The same applies for then making the current main residence the main residence again, the criteria is not set and so is again very open to interpretation.

You also need to bear in mind that you lose Primary Residence relief at the rate of £1 for every £2 that the estate is valued above £2mil.

Sorry that I guess this isn't much help!

Nik

[ParkerTalbot]

Thanks Nik, appreciate the replies - I'd expected there not to be any real way around this but always pays to double check!

[supersport]

I feel like I should know this, and a little reading doesn’t entirely are all the answers clear.

How does income tax work in retirement where you have multiple pension sources, e.g multiple DB and multiple DC pensions and the state pension kicks in.

I understand the state pension is paid gross, do all the other providers pay out net of tax? One of them may have to withhold tax due on the state pension.

Do you still get a tax code, well clearly you do, cut is it relevant for the pension providers. I can see variable draw down making things messy.

I guess I will still be completing a self assessment

[Jamp]

Any tips for managing IHT for unmarried parents? We hope to live a long time, but with babies on the way it's time to get responsible with wills and life insurance. We have no plans to marry. We want to essentially give our estates to our partner and on to our children upon the second death, but mindful this is an IHT inefficient way to go about it since IHT will be payable twice (potentially a significant sum upon second death, after life insurance payouts from the first), so it may be better to bypass the partner, especially with respect to the main residence where we'd get extra IHT allowance if passing to descendants (though partner would need to live in it still..). How to do that when the children are young (or in utero!) without leaving the partner in financial difficulty, or with scope for the children to waste the money on cars and booze at 18?! Could funds (and house?) be left in trust to the children with the partner as trustee until the children are, say 30? Any other ideas or tips?

[pingu393]

Jamp said:

Any tips for managing IHT for unmarried parents? We hope to live a long time, but with babies on the way it's time to get responsible with wills and life insurance. We have no plans to marry. We want to essentially give our estates to our partner and on to our children upon the second death, but mindful this is an IHT inefficient way to go about it since IHT will be payable twice (potentially a significant sum upon second death, after life insurance payouts from the first), so it may be better to bypass the partner, especially with respect to the main residence where we'd get extra IHT allowance if passing to descendants (though partner would need to live in it still..). How to do that when the children are young (or in utero!) without leaving the partner in financial difficulty, or with scope for the children to waste the money on cars and booze at 18?! Could funds (and house?) be left in trust to the children with the partner as trustee until the children are, say 30? Any other ideas or tips?

It will be interesting to find out if you can leave something to someone who wasn't born before you died.

[Intelligent Money]

supersport said:

I feel like I should know this, and a little reading doesn’t entirely are all the answers clear.

How does income tax work in retirement where you have multiple pension sources, e.g multiple DB and multiple DC pensions and the state pension kicks in.

I understand the state pension is paid gross, do all the other providers pay out net of tax? One of them may have to withhold tax due on the state pension.

Do you still get a tax code, well clearly you do, cut is it relevant for the pension providers. I can see variable draw down making things messy.

I guess I will still be completing a self assessment

Hi Supersport

Each provider will pay net of basic rate tax. When you start drawing from a new scheme HMRC are notified and they will adjust your tax code based on the total income.
Dependant on the total income you may then also need to complete a self assessment at the end of the tax year.

Cheers

Nik

[Intelligent Money]

Jamp said:

Any tips for managing IHT for unmarried parents? We hope to live a long time, but with babies on the way it's time to get responsible with wills and life insurance. We have no plans to marry. We want to essentially give our estates to our partner and on to our children upon the second death, but mindful this is an IHT inefficient way to go about it since IHT will be payable twice (potentially a significant sum upon second death, after life insurance payouts from the first), so it may be better to bypass the partner, especially with respect to the main residence where we'd get extra IHT allowance if passing to descendants (though partner would need to live in it still..). How to do that when the children are young (or in utero!) without leaving the partner in financial difficulty, or with scope for the children to waste the money on cars and booze at 18?! Could funds (and house?) be left in trust to the children with the partner as trustee until the children are, say 30? Any other ideas or tips?

Hi Jamp,

First congratulations on starting your family, and good luck, parenting is a whole new ball game!!!
A couple of things to consider. Holding your property as tenants in common rather than as a joint tenancy splits the ownership 50/50. This means that on death half the house can pass to the children while the survivor retains their half. This can help avoid gift with reservation rulings from an IHT perspective. Place any life insurance in trust. Split the life insurance out into insurance for the children's future and insurance for the surviving partners use. The benefits in the trust should sit outside of the estate of the surviving spouse and the premiums used to pay for the insurance should be exempt under the gifts from regular expenses rule. A flexible or discretionary trust can include "any future children" as potential beneficiaries so this will allow it to provide for a growing family.

Hope this helps as a starting point, feel free to drop me a message if you need any more detail.

Final consideration who said that spending money and booze and cars was wasting it!

Cheers

Nik

[isleofthorns]

dealing with an IHT situation with my late father's estate.

a company he founded bought a property back in 1981, in which he lived and operated his office ever since. About 15 years ago he transferred his shares in the company to myself and my brother (we've both had roles in the business and my brother runs it now). he continued to work in the business until his death this year. The office remains at the house.

throughout his time living at the property he paid annual tax on the benefit of the provided accommodation, and tax on his share of the running costs and maintenance, in line with BIK rules.

the solicitor dealing with his estate has flagged the share transfer (as it owns the property) as a potential gift with reservation - we've explained the property was never owned in his name and that the shares were transferred over 7 years ago, Dad was active in the business and paid tax of the use of the house throughout.

any thoughts?

[Carbon Sasquatch]

No matter what you thought - either he owned the property or the company owns the property - what to Land Registry say ?

It's easy to mentally mix things with a family business, but ownership of the asset should be clear.