ISA and estate planning
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r3dh3d
Posts: 2 Newbie
So, my Mum is getting on a bit. My Dad passed away a few years ago and she owns their enormous house outright. She is planning to downsize, but rather than selling up and buying something smaller near us, the idea is to gift us her current house (as a PET) and buy something smaller in her neighbourhood using her other funds.
'Other funds' are (approximately) 1/3 each cash, ISA and portfolio outside the ISA. It will more than cover the cost of the new flat.
She wants to sell out all of the ISA and portfolio completely and hang onto as much cash as possible. She finds the ISA/portfolio stressful; the bank swamp her with paperwork she doesn't understand and the logic of replacing this mysterious pile of risky paper with bricks and mortar that she understands hugely appeals to her.
My view is she should work out how much cash she *needs* as a float (her income consistently exceeds her outgoings) use up the rest of the cash and then sell the portfolio before the ISA, piecemeal if necessary to use CGT allowances etc and avoid as many exit penalties as possible. My gut feel is that the ISA is a good thing, and anyway it's got to be cheaper to move cash than close down any sort of investment. But I don't have a good picture of what happens when you take money out of an ISA - they seem to be sold on the basis you just keep chucking money into them and the payback is the warm fuzzy you get from sitting on a big heap of money you never touch.
Realistically, what is the 'cost' of withdrawing from an ISA? And what is a reasonable timescale? I'm trying to work out if she is going to need a short-term loan, or whether we need to persuade her to let us chip in.
'Other funds' are (approximately) 1/3 each cash, ISA and portfolio outside the ISA. It will more than cover the cost of the new flat.
She wants to sell out all of the ISA and portfolio completely and hang onto as much cash as possible. She finds the ISA/portfolio stressful; the bank swamp her with paperwork she doesn't understand and the logic of replacing this mysterious pile of risky paper with bricks and mortar that she understands hugely appeals to her.
My view is she should work out how much cash she *needs* as a float (her income consistently exceeds her outgoings) use up the rest of the cash and then sell the portfolio before the ISA, piecemeal if necessary to use CGT allowances etc and avoid as many exit penalties as possible. My gut feel is that the ISA is a good thing, and anyway it's got to be cheaper to move cash than close down any sort of investment. But I don't have a good picture of what happens when you take money out of an ISA - they seem to be sold on the basis you just keep chucking money into them and the payback is the warm fuzzy you get from sitting on a big heap of money you never touch.
Realistically, what is the 'cost' of withdrawing from an ISA? And what is a reasonable timescale? I'm trying to work out if she is going to need a short-term loan, or whether we need to persuade her to let us chip in.
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Comments
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With regard to the ISA portfolio, your mother's income and gains are free from income tax and capital gains tax.
Interest received from any cash ISA is free from income tax.
Do you and your siblings want the house? What would you do with it?
With regard to IHT and the family home see http://thetimebank.co.uk/blog/2015/12/2017-iht-rule-changes/
http://justwillsandlegalservices.co.uk/latest-news/the-7-year-rule-inheritance-tax-and-lifetime-gifts/ may be worth a look.
Rather than relying on gut feelings, would it not be advisable for your mother to take expert advice?
http://societyoflaterlifeadvisers.co.uk/0 -
I assume from what you say that its a cash ISa. Is it in a fixed term account? If not transfer out should be free and a few days at most, just like transferring from any other bank account. If it is in a fixed term account then you need to look at the Ts & Cs.
As her expenditure is normally more than covered by her income is she aware that gifts from income are not at risk from inheritance tax provided they are paid as part of her normal type of expenditure? The rules are imprecise but provided the situation is well documented my experience is that HMRC are very reasonable.0 -
I have no siblings. Neither does she. So the plan would simply be for me (and my husband, kids, dog etc) to move into her house, which would have other advantages for us - it has a downstairs bedroom and bathroom which we need - and then I'd be 5 minutes away when she needed me.
The house is in a *very* expensive area. I haven't mentioned the separate shareholdings (which she can't sell or give away because she needs the dividend, so they aren't really on the table atm) so at present she's worth about £3m, house being about £1.5m of that.
Re: advice - I'd like to get my head around it first tbh before anyone tries to sell her anything.0 -
Re: advice - I'd like to get my head around it first tbh before anyone tries to sell her anything.
The role of a properly qualified adviser ( solicitor/IFA ) is not to sell your mother anything but to assess her personal circumstances from the point of view of her current and future needs/ her tax situation/ her will/ the IHT situation etc.
The link I gave may assist in sourcing what is required if it is required.
Your mother's income from her cash isa is tax free.
She has no CGT to pay on investments within her ISA portfolio and no further tax to pay on income received from it.
In addition, she may have a personal Savings Allowance and dividend allowance - see
http://www.skerritts.co.uk/pages/Income+Tax+-+All+change+from+the+6+April+-+The+Personal+Savings+Allowance+and+Dividend+Allowance
Regarding gifting the family home see
http://www.howellslegal.co.uk/news/post/Gifting-The-Family-Home-Options-To-Consider.aspx
https://www.gov.uk/government/publications/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band/inheritance-tax-main-residence-nil-rate-band-and-the-existing-nil-rate-band
https://www.gov.uk/topic/personal-tax/inheritance-tax0 -
so at present she's worth about £3m, house being about £1.5m of that.
Re: advice - I'd like to get my head around it first tbh before anyone tries to sell her anything.[/QUOTE
If your mother's Estate is worth around 3 million, then you would be well advised to seek professional advice from an IFA.0 -
As mentioned above, I would advise seeking professional advice.
Treating the house as a PET, is a gamble on mortality, a potentially costly one.
Assuming all NRB still available that is £650k, with a 'potential' bill of £940k? Is that a figure that you would be able to get your hands on to pay the IHT?
Seek professional guidance, this forum, with will not offer you the professional, indemnified guidance you need.
Good luck0 -
Credit-Crunched wrote: »As mentioned above, I would advise seeking professional advice.
Treating the house as a PET, is a gamble on mortality, a potentially costly one.
well, if the OP's mother unfortunately died just after giving away the house (as a PET), exactly the same IHT would be due as if she hadn't made the gift. but if she lives at least 7 years after the gift, there's a big reduction in IHT due. (and with a partial reduction in IHT for some intermediate scenarios.)
you can call that a gamble if you like, but there is nothing actually lost by making the PET.
in some cases, it is true that amateur attempts to avoid IHT can backfire, and even increase total taxes paid. but making PETs is straightforward enough, so long as you don't do something over-complex like giving away your house while continuing to live there - which is not the intention in this case.Assuming all NRB still available that is £650k, with a 'potential' bill of £940k? Is that a figure that you would be able to get your hands on to pay the IHT?
this is unnecessarily alarmist. you don't lose your inheritance because you can't come up with the IHT. i think you can use money within the estate to pay the IHT due.Seek professional guidance, this forum, with will not offer you the professional, indemnified guidance you need.
Good luck
i'm not against the idea of getting advice, though i think that might be more useful re investments than IHT. the OP mentioned "shareholdings (which she can't sell or give away because she needs the dividend". shareholdings are not guaranteed to keep paying the same dividend, so advice on whether she could generate her target income in more secure ways might well be in order. that would be something for an IFA.0 -
grey_gym_sock wrote: »well, if the OP's mother unfortunately died just after giving away the house (as a PET), exactly the same IHT would be due as if she hadn't made the gift. but if she lives at least 7 years after the gift, there's a big reduction in IHT due. (and with a partial reduction in IHT for some intermediate scenarios.)
you can call that a gamble if you like, but there is nothing actually lost by making the PET.
in some cases, it is true that amateur attempts to avoid IHT can backfire, and even increase total taxes paid. but making PETs is straightforward enough, so long as you don't do something over-complex like giving away your house while continuing to live there - which is not the intention in this case.
this is unnecessarily alarmist. you don't lose your inheritance because you can't come up with the IHT. i think you can use money within the estate to pay the IHT due.
i'm not against the idea of getting advice, though i think that might be more useful re investments than IHT. the OP mentioned "shareholdings (which she can't sell or give away because she needs the dividend". shareholdings are not guaranteed to keep paying the same dividend, so advice on whether she could generate her target income in more secure ways might well be in order. that would be something for an IFA.
This is my point, incorrect information given on a forum that could be very very costly.
IHT is due 6 months after the death of an individual, and probate can only be issued when the tax is paid. The only way that the estate can be used to settle the debts, in certain situations is where there is sufficient cash reserves to make the payment. So, you are incorrect, the executors of the estate will have to realise the IHT due, prior to probate being issued, as in this example a lot of the estate is in bricks and mortar.0 -
Credit-Crunched wrote: »This is my point, incorrect information given on a forum that could be very very costly.
IHT is due 6 months after the death of an individual, and probate can only be issued when the tax is paid. The only way that the estate can be used to settle the debts, in certain situations is where there is sufficient cash reserves to make the payment. So, you are incorrect, the executors of the estate will have to realise the IHT due, prior to probate being issued, as in this example a lot of the estate is in bricks and mortar.
actually, on that precise point, you're wrong: because where most of the estate is in property, you can pay most of the IHT later than probate (with interest added).
if you're making the general point that IHT is complicated, there's lots to learn about it, etc, then clearly you're right about that.
what i was particularly picking up in my last post was the impression you might have given that beneficiaries of an estate could end up in a catch-22 situation, where they couldn't pay the IHT until they obtained probate, and they couldn't obtain probate until they paid the IHT. that is simply not the case: there are ways of getting out of that, when you look into it.0
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