Inheritance Tax Planning

fagun

reddevilled wrote:

In order to do this you would have to create what is commonly called a "nil-rate discretionary trust". If you speak to your solicitor about drafting a will then a well worded will will last you many many years as opposed to having to change it every year.

My assets are quite simple, so I'm DIYing a will - solicitiors tend to cost a bit.
Is there a particular reason why I need a discretionary trust? I understand that they have penal taxing and it adds complexity to my financial affairs.
Thanks

whiteflag_3

dunstonh wrote:

Off the top of my head, the 7 year rule would apply to the pension contribution as far as a single premium goes. However a regular contribution wouldnt suffer the 7 year rule due to the different way they are treated.

Sorry dont understand this? Have i missed something what is this refering to?

sneekymum

Gifts out of income.

sneekymum

fagun wrote:

If it's in your name, most pension are administered in trust. You fill in a "Expression of Wishes" to the trustees stating your preferred beneficiaries. The trustees retain "discretion" on who benefits from your pension if you die before it pays out - hence no IHT to pay

That is what I originally meant

- but paying into a pension for someone else - out of income - and without your lifestyle suffering is also outside IHT

dunstonh

Im starting to question myself on some of the points here and would prefer to look up to make 100% sure... (part of the issue is looking at pre "A" day and post "A" day issues).

A personal pension is a discretionary trust. Therefore any benefits would be paid outside of the estate (regardless of whether you complete a nomination of beneficiary or not). So, when you die, the pension fund does not form part of your estate for IHT purposes.

After some thinking and checking, I'm not sure the 7 year PET rule applies here (yet) on single premiums into pensions (as it would do with other investments) as you are not making a gift. I've done a bit of checking up and cannot see anything that says IHT would be payable on death (with single premiums).

Seems a bit of a loophole to allow it to have no IHT payable as a terminally ill person could stick in rather large lump sums (from April next year) and avoid paying the tax. Not only that, they could also get tax relief on the contributions, upto 100% of their income.

Im sure I have seen something on IHT likely to come into play somewhere with single premiums but cannot put my hands on it now. I will take a look on some of the "A" day material later in more detail and see if I can find it.

whiteflag_3

My understanding - post A day ( as this will effect most people) is that if you defer taking pension benefits ,especially if you are not in good health , the revenue could deem that IHT is payable.

The gifts out of income / 7 year rule is a different kettle of fish

fagun

HMRC keep on changing the rules retrospectively, so anything is possible.
However - A Day is about simplifying Pension rules (see http://www.fsa.gov.uk/consumer/06_PENSIONS/index.html) - the types of things that chnage relate to limits, having to buy annuities, etc.

The basic principles around pension structures should not change. Pensions have a tax wrapper and managed by trustees. If you die before you start using your pension, then this amount should not be part of your estate - but you need to look at the rules for your pensions scheme (some schemes return the money if you die within the first two years). The trustees will pay.

If you die after you start drawing down, then the annuities etc rules apply. A-Day may make a difference here. I've never investigated as I'm miles away from retirement day.

The big problem with using pensions as an IHT scheme is that you're locking your money away until retirement age. Unless you're close to that age, your intended beneficiaries won't be able to touch it for a long time. So tax efficient but not always practical.

dunstonh

whiteflag wrote:

My understanding - post A day ( as this will effect most people) is that if you defer taking pension benefits ,especially if you are not in good health , the revenue could deem that IHT is payable.

The gifts out of income / 7 year rule is a different kettle of fish

Thats probably what I read. I'm sure it was following one of the many "exploits" that the media and others mentioned (prematurely) where single premiums could be used to avoid IHT. This was then followed by comments saying that these would/could have some consideration under IHT rules.

However - A Day is about simplifying Pension rules (see http://www.fsa.gov.uk/consumer/06_PENSIONS/index.html) - the types of things that chnage relate to limits, having to buy annuities, etc.

That may have been the idea behind A day. However, the knock on effect of these changes has led to a number of potential loopholes. Mostly impacting on tax. Comments have been made saying that many of these loopholes will be closed and will involve areas of taxation.

Until the final workings are issued in January, it isnt safe to assume anything. Plus you have next years finance act to mop up any amendments that need to be made (as per usual with past major changes).

sneekymum

dunstonh wrote:

That may have been the idea behind A day. However, the knock on effect of these changes has led to a number of potential loopholes. Mostly impacting on tax. Comments have been made saying that many of these loopholes will be closed and will involve areas of taxation.

Yes - I was planning to pay all the household income (bar the minimum threshold) into pensions and gain (more)thousands in Tax Credits...

dunstonh

Yes - I was planning to pay all the household income (bar the minimum threshold) into pensions and gain (more)thousands in Tax Credits...

Yes, you could make a single premium investment, reducing your income to zero (or at least to the working/childrens tax credit thresholds) and earn thousands of pounds in credits. I did a quick calculation where someone could pay £12,000 into a pension as a single premium investment and gain just over £6000 in tax credits for 12 months. Thats not a bad return when you consider the tax relief as well.