commission v fees

EdInvestor · 28 October 2006 at 8:56AM

Yes there's a lot of confusion over capital and income, isn't there?

It's amazing how many people don't know that people can give away an unlimited amount of money from income IHT free every year, as long as it doesn't impact their lifestyle,without it being caught by the 7 year rule.

This is not the case with capital - capital gifts over 3k will be caught.The 5% withdrawals from the investment bond are classed as capital, and will be caught.

Whereas if income is maximised, the heirs can receive 5% a year completely free and clear of IHT from the start, a total of 340k over 10 years. This will be made up of tax free dividend income (to the investor and the heirs)in the 4.5-4.7% range, topped up by tax-free capital gains.

The investor can give all his divi income to his heirs.He can cash in 9k a year of capital gains completely tax free. He can give 3k of that tax free to his heirs and spend the rest. [His income is being topped up by the annuity which is tax free to the care home and not regarded as part of his own taxable income, and thus his lifestyle won't be impacted.]

Meanwhile the 400k capital is still growing at about 4.5% average net of charges, none of it is being withdrawn. After 100k of the NRB allowance is applied to the total fund [the other 200k being reserved for the house]now over 600k, and IHT is deducted, slightly more than the original c.410k remains as the cash legacy.

So the total bequest is c.750k plus the house, of which 340k is received annually over the ten years by the heirs and 410k is received at the end.

Don't forget the argument is not actually about saving tax, it's about delivering the largest pot of money to the heirs.

[I have ignored the effect of the age allowance in this case because it is better to maximise income to save tax from the heirs' point of view and a considerable sum (100k) has been set aside to increase tax free income via the immediate needs annuity.]

Tiggs_2 · 28 October 2006 at 9:26AM

"The investor can give all his divi income to his heirs.He can cash in 9k a year of capital gains completely tax free. He can give 3k of that tax free to his heirs and spend the rest, replacing 6k of his pension income which he can also give to his heirs again completely tax free."

are you suggesting the use of withrawals from capital assets to assist with income having passed the true income via normal expenditure relife?

jem16 · 28 October 2006 at 10:46AM

EdInvestor wrote:

Yes there's a lot of confusion over capital and income, isn't there?

Yes you do seem a bit confused

It's amazing how many people don't know that people can give away an unlimited amount of money from income IHT free every year, as long as it doesn't impact their lifestyle,without it being caught by the 7 year rule.

Who is to say what "doesn't impact their lifestyle" means - bit subjective, I think.

Whereas if income is maximised, the heirs can receive 5% a year completely free and clear of IHT from the start, a total of 340k over 10 years. This will be made up of tax free dividend income (to the investor and the heirs)in the 4.5-4.7% range, topped up by tax-free capital gains.

So to avoid IHT, I give £340k away?

The investor can give all his divi income to his heirs.He can cash in 9k a year of capital gains completely tax free. He can give 3k of that tax free to his heirs and spend the rest, replacing 6k of his pension income which he can also give to his heirs again completely tax free. [His income is being topped up by the annuity which is tax free, and thus his lifestyle won't be impacted.]

Or;

As I am able to give my 5% income pa plus an extra 3k pa from capital to my heirs, I obviously don't need to take as much as 5% pa from the bond. That will allow the bond to make more over the 10 years, all of which is free from IHT.

Meanwhile the 400k capital is still growing at about 4.5% average net of charges, none of it is being withdrawn.After 100k of the NRB allowance is applied to the total fund [the other 200k being reserved for the house]now over 600k, and IHT is deducted, slightly more than the original c.410k remains as the cash legacy.

400k at 4.5% is £621,188. Take off the £100k is £521,188. 40% IHT on this is £208,475. That leaves £312, 712 not c. £410k

So the total bequest is c.750k plus the house, of which 340k is received annually over the ten years by the heirs and 410k is received at the end.

No it's £650k

Don't forget the argument is not actually about saving tax, it's about delivering the largest pot of money to the heirs.

Exactly.

The bond at 9% would grow to £1,183,682. Allowing £150k for income withdrawals(probably don't need all of this as your plan keeps giving all the income away and relying on the annuity) takes it down to £1,033,682. The bond would need to lose £383,682 in charges to fall to your level.

I don't think so somehow.

[I have ignored the effect of the age allowance in this case because it is better to maximise income to save tax from the heirs' point of view and a considerable sum (100k) has been set aside to increase tax free income via the immediate needs annuity.]

You appear to be ignoring it by giving away £34k of your income each year. Do you think the tax man will see that as something which "doesn't impact your lifestyle"? - it's more than I earn in a year!!

jem16 · 28 October 2006 at 11:32AM

Nearly forgot

EdInvestor wrote:

I would suggest that the OP's rellie, as a basic rate taxpayer taking a 5% net income pa, after 10 years of investing directly outside the bond and paying virtually no charges, should s/he then pass away, the estate [net of IHT @40%] would be as much as double what it would be if the bond/trust was used.

After kindly providing your figures on a proper investment which would net £650k (assuming the tax man lets her away with disposing of £34k every year), this would mean(according to above statement) that the bond would only be worth £325k after 10 years. I seriously doubt it would perform so poorly.

A sweeping statement which Ed herself has proved to be pure fiction.

Chrismaths · 28 October 2006 at 4:29PM

b)He also needs to deduct the tax on the chargeable gain when the bond is encashed as well as the 250k capital withdrawals over the 10 years.

Depends on who the beneficiaries are. The bond wouldn't have to be cashed in - it would be more sensible to assign segments of the bond to the beneficiaries. They could still use any tax deferred 5% withdrawals that were remaining, and when it came that they wanted to encash part/all of the bond, this could be arranged to be at a time when they are not taxpayers (say with a stay at home wife, or if the beneficiary is a minor). In that case there is no tax at all to pay. It gives a huge amount of flexibility.

Tiggs_2 · 28 October 2006 at 7:48PM

Chrismaths wrote:

The bond wouldn't have to be cashed in - it would be more sensible to assign segments of the bond to the beneficiaries.

Thats just crule - having destroyed Ed's argument anyway to now raise segment assignment between benerficiariers to avoid HRT on gains is just sticking the knife in

commission v fees

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