Tax & IHT guidance - Intelligent Money Private Clients

[Intelligent Money]

Whilst strong returns and keeping costs to a minimum are the key drivers to successful investing, there is another very important factor in play that can often be overlooked.

Tax efficiency for today and tomorrow cannot be ignored and robust advanced tax planning can make a big difference to your current and future financial position.

Whether it is ensuring you use all of your tax allowances every year to prevent a large future tax bill, or structuring your holdings to mitigate high inheritance tax (IHT) costs, there are many ways we can help you to understand the options open to you.

This is a free initial service to all PHers and a free ongoing service to all of our Private Clients.

Whilst, due to the very nature and individual variances of this subject, most people would wish to discuss this offline, however this thread is available for anyone wanting answers to generic questions on these matters.

If your post is not related to tax planning, we have four other threads:

• General investments
• Individual Saving Accounts (ISAs)
• Pensions & SIPPs
• General financial guidance

Intelligent Money

[Intelligent Money]

I am keen that this doesn’t descend into a back and forth distraction so this post is to try and lay out the objective purpose of the forum.

IM set it up to offer guidance and answer questions on general finance and provide a platform for others to share their view. Based on the way IM represents itself people may then decide to explore the services of the IM “the business” or not.

To be clear any answer supplied on a forum will by its nature always be guidance and not Regulated Financial advice.

We agree that everybody should be aware that we offer Guidance not Regulated Advice and anybody that has chosen to deal directly with IM Private Clients is very aware of this.

For clarity Guidance provides you with information and explanations that you need to be able to make your own decision about the correct action for you. You are responsible for the decision that you make.

Regulated Financial Advice is a specific recommendation for you by a regulated adviser and the adviser is responsible for ensuring that the recommendation is appropriate for you.

IM Private Clients is a guidance service that will work with you to help you understand the options, the tax position and pros and cons of the solutions available and a general overview of the things you may want to consider. You are then able to decide what you want to do.
This will typically be discussion about the investment vehicles available ISA, Pension, GIA etc and the how different investment approaches work.

I believe that people that have dealt with IM Private Clients will testify to the fact that we don’t “flog investments” or “sell IM Investments”. I am not aware of anybody who has spoken to any of the team and feels that they have received a sales pitch.

We aim to only discuss IM investment if asked to do so, and if asked we will provide information and detail about the options available, so you are able to decide if you believe it is right or you.

It is a service we are happy to offer, for those who find it of interest please feel free to use and abuse it, for those that feel it isn’t right for you please feel free to not to.

Regards

Nik

[Intelligent Money]

abph said:

Hi IM/Nik,

Firstly, just wanted to thank Intelligent Money for offering such service. I would like to be one of the first to get stuck in.

I have used a separate account given information provided below is in the public domain, and obviously sensitive.

My wife and I want to begin considering IHT implications of the below situation. We are both 34, and would like to consider the basics of IHT planning and vehicles to allow ease of passing to our two kids (come the fateful day). We have our investment strategy and personal finances dialed. We therefor would like to consider the basics of IHT planning and vehicles to allow easy of passing to our Kids (come the fateful day). Our current long term holdings thus:

Equities in GIA - £450k
Equities in Pension - £10k
Equities in ISA's - £30k

I anticipate ISA and pension to total over £1m with GIA over £3m in the next 20 years (assuming many things of course). We will own our currently mortgaged home outright by this time. We will be mid 50's by this time, and will then begin to draw down.

I have seen that Trusts are beginning to phase out, instead being replaced by Family Investment Companies. Is this something that
would benefit me/us, as we can then make our 2 kids share holders? Perhaps you could use the above example to show an estimated tax position and how this can be mitigated?

Thanks in advance and over to you!

Hi ABPH

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 £125,000 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.

The use of trusts and Family Investment companies seek to make use if the 7-year gifting rule. The asset is gifted but the trust/investment company allows you to maintain control of the assets and in some instances benefit from any growth/return on the asset.

Family Investment Companies have become more popular after the tax position on Trusts changed in 2006 and many trusts became subject to a tax charge on establishment.

A Family Investment Company is established in the same way as any Ltd company. The structure of the Directorships and shareholdings allow control of the assets and distribution of gains/returns. As with any IHT panning solution the costs of established and management need to be weighed up against the tax saving along with the tax position on gains and distributions which are potentially subject to both Corporation and Income Tax.

I hope this helps. There are several “wrinkles” and offshoots from these main principles that can be applied given individual circumstances and needs.

As Julian has said if you would like to talk through your individual situation I’m very happy to share thoughts and ideas with you for you to consider.

Regards

Nik

[Intelligent Money]

PM3 said:

On the Gift theme ....
If I were to pay off my childs university fees loan ( 27 K ) in one transaction , is this same as a gift for tax purposes ?

Hi PM3

A bit of a grey area I am afraid. If your child is still in full time education then the repayment of student loan by a parent is usually IHT exempt. If you are paying education fees "as you go" i.e. while they are in education the payments are also usually IHT exempt.

If they have now left full time education it is likely to be treated as gift and so be taken into account for IHT.

Cheers

Nik

[Intelligent Money]

ben5575 said:

OK, I'll start with a nice hypothetical, non personalised example that explores some first principles of tax planning (can spot my naivety yet?)

Understanding that every individual has separate goals, so circumstances differ and in words that an intelligent 14 year old can understand....

If I 'do a deal' that leaves me with £1m cash (after fees/costs etc) in a Ltd company, what is the most efficient (and legit!) way of extracting it? All in one go? Spread out over a few years? How does it all work? Option 1 might be entrepreneurs relief? If that doesn't apply as I've used my allowance, what next?

The simple stupid basics please, for a thicky who doesn't do finance

Hi Ben5575

Assuming you are talking about £100k of profit within a Ltd company and how to extract that £100k excluding the use of Entrepreneurs Relief you are looking at 3 main options :
Pension Contributions, Drawing it as Taxable Income, Drawing it as Dividend or a mix of all three.

Employer Pension contributions are the most tax efficient as it they are treated as a business expense. You may be able to use carry forward rules to increase the size of the contribution you can make.
You would also need to take into account the point at which you need/want access to the money and the tax considerations at that point but as a tax efficient way of taking money out of the business it is very efficient.

Drawing the money as income or dividend is dependant on your other income at the time of withdrawal.

The effective tax rates are :

Income with the basic rate band:
Taken as Income effective tax rate : 45.80%
Taken as Dividend effective tax rate : 26.50%

Income with the higher rate band:
Taken as Income effective tax rate : 55.80%
Taken as Dividend effective tax rate : 51.50%

Income with the additional rate band:
Taken as Income effective tax rate : 60.80%
Taken as Dividend effective tax rate : 57.10%

If there is no other income you can also take into account your personal allowance and NI doesn’t kick in until £9,568.

If you don’t need the money in one go you can draw the money down over different financial years to keep the draw down in lower tax bands.

Cheers

Nik

[Intelligent Money]

ben5575 said:

Thanks Nik, that's helpful, not quite what I was suggesting but I'll catch up with you separately with the specifics of that's ok please?

It was more about trading off pensions (and any limitations around that) vs corp tax vs paye vs divi vs anything else for £1m rather than £100k left in a business bank account at year end as the income banding has much more of an affect at that level.

But putting that to one side and picking up on the pension thing... For example: How much can a company put into a personal pension? Is it a fixed maximum or a maximum % of earnings and if so are these PAYE earnings or divi earnings. Is it an annual maximum or a lifetime maximum that a single company can put in a private pension (so could I have five companies putting maximum amounts) or is the maximum relative to me?

Then how much can I put into a pension? Is it unlimited or capped? Lifetime or annual? Is a maximum figure or % of something if so what? What does 'carry forward rules' mean?

I'm sure those are really simple questions to those who do this everyday. But to thickos like me and other similar idiots reading this thread ( ), I thought it might be helpful to provide a simple overview. If indeed a simple overview is possible?!

Hi Ben5575

Apologies I don't know where I came up with £100k from!! Unfortunately the principle is the same but the tax liability is greater and any exit over time takes a lot longer!!

It is possible to put the cash to work while still held in the business by investing the capital in the businesses name.

On the pension contribution question, a company can contribute £40k into a pension for an employee or director. This is irrespective of the individuals earnings. Subject to a couple of other criteria you may be able to go back three years to mop up missed contributions as well so it may be possible to contribute a maximum of £160k in a given tax year. This is called carry forward.

The 2nd factor to account for is that as an individual the maximum that be paid into a pension in your name is £40k, p.a. from all sources, so if you have five companies they can contribute a maximum of £40k between them. If you have carry forward to use the contribution is again the maximum for you, so if it was £160k this is a £160K from all sources.

Hope that makes some sense

Cheers

Nik

[Intelligent Money]

Steve H said:

Isn’t the £125k now £175k? I thought it had increased yearly from when it was introduced to this amount?

And for those that have been fortunate enough not to have to deal with any of this stuff yet, the allowances do not get used when someone passes their estate on to their spouse (because that is IHT free) but when that spouse dies their estate can use the allowances of both, effectively doubling the IHT exemption allowance.

Nik, could you confirm if this applies to the house allowance as well as the personal allowance please (and correct any other errors I’ve made there ).

Apologies Steve you are correct it is now £175k property allowance, I would love to claim typo but for some reason the £125k from 8/19 was stuck in my mind when I put the previous answer together.

You also correct that with a married couple if the £325k allowance isn't used on first death it passes to the survivor so there is £650K of allowance available.

Gifts/transfers between spouses are IHT exempt so as you describe if on first death the entire estate is passed to the spouse there is no IHT at that point at the £325k allowance has not been used as passes on with the estate.

Cheers

Nik

[Intelligent Money]

pingu393 said:

My dad died before my mum and I was warned that ALL of my dad's estate had to have passed to my mum for this to happen.

So beware of splitting your estate if you are first to die.

IHT can get quite detailed so it is sometimes difficult to keep the content generic as the application of the "rules" is were the detail lies.

If on first death some of the £325k allowance is used to make some gifts then only the remaining allowance passes to the surviving spouse.

As an example. If Dad gifts £225k to a child on his death and the rest of the estate passes to his wife, on her death there is an allowance of £425k, i.e. her allowance of £325k + The remaining £100k allowance from her husband.

You may plan to do it this way if the surviving spouse has no need for the £225k of asset because the asset is passed down IHT free and from that point any growth is also outside if the estate.

Cheers

Nik

[Intelligent Money]

Steve H said:

And does the property allowance pass on in the same way irrespective of whether that was not even available when the first spouse died?

Hi Steve H

The property allowance would apply at the time that the house became part of the estate for IHT assessment.

Cheers

Nik

[Intelligent Money]

Spunagain said:

Hi IM/Nik
A couple of questions. Is it correct that savings held in pension pots and Bonds are exempt from IHT?
Cheers

I think a couple people have already answered on this.

Summary, both SIPP and Pension pots can be placed outside of the estate on death so no IHT is payable and the value of the pension isn't added to the estate so doesn't use any allowance.
Over age 75 the pot isn't subject to Income Tax rates in the hands of the beneficiary.

Unless used as part of a tax planning tool Bonds form part of the estate and are assessed for IHT

Regards

Nik

[Intelligent Money]

PM3 said:

It peaked my interest as I am at the early planning stage of rounding up a few small employer DC pensions with a view to rolling into a SIPP ( not the reasonable DB final salary one that I will leave alone ) ....and I have been wondering what is the precedence of defining the beneficiary upon kicking the bucket .
If I state for example our offspring ( only one ) as opposed to wife .....does this get ignored as I have a simple will stating wife gets all upon my demise and child should It me both of us .
There is reasoning to this as basically when I kick it my wife does not need that extra SIPP money and if ( which absolutely expected) she outlives me and it will ultimately just get hammered when she dies and passed to our child. whereas ( and its not a lot ) an extra income boost pot for the young one will probably be of more use .
(English law )

HI PM3

You can nominate anybody as a beneficiary and SIPPS are frequently used to pass benefits down to children. It is technically an "expression of wish" which means that the administrators can decide who to pay the benefits to and it is this that helps with the IHT tax efficiency. It is very rare for the benefits not to be paid to the nominated beneficiaries though.

Cheers

Nik

[Intelligent Money]

Four Seasons Total Landscaping said:

IHT question please IM

In a nutshell. My lovely MIL has arranged her affairs so that a six figure sum, part of her estate, will be sheltered from IHT via something called ‘Business Property Relief’. The two years qualifying period will be up in mid October this year.

Sadly she has now had to go into a nursing home, is very poorly and probably won’t survive much longer.

The question is, does she loose the entire relief on that ‘sheltered’ amount should she die before the relevant date in October, or is there some degree of tapering, akin to the usual seven year rule/gifts arrangement with IHT?

TIA

Hi,

BPR doesn't have any tapering benefit I'm afraid so it is all or nothing based on the 2 year qualifying period.

Regards

Nik

[Intelligent Money]

Simpo Two said:

This was new to me. A friend is clearing his late parents' house - he said that some of the items are 'heirlooms' and therefore IHT exempt. It seems that 'heirloom' is a recognised status. I have nothing in that league but thought I'd mention it for others. How does one obtain 'heirloom' status for things and is it really IHT exempt?

Hi SimpoTwo

This is one that I may stand to be corrected on, but in my experience an "heirloom" is defined as an article that is passed from generation to generation but is only granted that status by family interpretation, HMRC will treat the market value of the heirloom as part of the estate and so it is treated as any other asset when assessing the IHT position of the Estate

Cheers

Nik

[Intelligent Money]

williaa68 said:

Can I please ask a question about VCTs and CGT pooling rules. I bought a VCT a little over five years ago. I bought the same VCT about six months ago. I would now like to sell the five-year-old VCT. Am I correct in thinking that the usual CGT pooling rules don’t apply and I can do this without losing the tax relief on the most recent purchase?

Thank you.

Hi williaa68

As far as I am aware there is no minimum holding period for you to gain the CGT relief on a VCT holding so you should suffer no capital gains on sale. The 5 year holding rule applies to Income Tax relief.

You may fall foul of "VCT Refreshing income tax relief" legislation if they view the purchase and sale as being linked.

"A sale is linked where the individual sold shares in the same VCT as the VCT subscribed, or in a ‘successor’ or ‘predecessor’ VCT, and either the subscription is in any way conditionally linked, or the subscription and sale are within 6 months of each other. ‘Successor’ and ‘predecessor’ VCTs are defined in new section 264A(7) ITA 2007."

You may want to double check with the provider before you sell.

Cheers

Nik

[Intelligent Money]

s111dpc said:

Hi, I have a question about IHT. My wife’s mum is in her 80’s and in poor health so is starting to think about IHT and whether she needs to do any planning.

She has a property worth £250k and about £160k in cash and assets. She’s aware of the £3k per year allowance and the £250 gifting limit but where’s she’s confused is over the property aspect and whether she can use any of allowance from her late husband who died some 20 years ago.

Her will currently splits her property and assets equally between her three daughters.

Any advice / thoughts gratefully received.

Hi s111dpc

As it stands your mother in law will have enough allowance to cover the estate value, £175,000 residence nil rate band and £325,000 nil rate band giving total allowance if £500,000 against an estate value of £410K

If it was required you could apply to use the additional residence nil rate band and any used nil rate band from for your late farther in laws death, but as it stands it wouldn't be required.

Regards

Nik

[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

[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

[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

[Intelligent Money]

Hi,

Your overview says the business bought the property. As long as this was at a market value then this should be clean and not subject to any gift with reservation restrictions.

When the business (shares) were gifted to you if he then lived in the property and paid no rent then this may be what they are looking at, as the implication is that the business was gifted on the undertaking he lived in the property that the business owned (the reservation)

I would think it is a bit of a stretch to apply it to the whole business and may just be able to apply it to the property, unless the property is integral in the running of the business.

You say your dad paid BIK tax for the use of the property but did this include the BIK for rent in lieu of salary, that's assuming he didn't pay rent?
If it did I would think you have a good case.

While I was putting this together I see Carbonasquatch has posted, I think we are saying the same thing!

Cheers

Nik