Annuity vs IHT

Gnittih

If I buy an annuity from my cash savings is the lump sum used for the purchase,immediately taken out of my estate for IHT?

mgdavid

Yes because it is spent - it is no longer your money.

Gnittih

But is it a PET?

atush

Ypur pension is not part of your estate at all for IHT. It only is, if you take it out as cash (so your 25% TFLS will be).

If you dont buy an anuity (leaving nothing to be inherited apart from 5-10 yr guaranteed periods or spousal pension if you buy joint) and leave the money in DD inside your pension, it is inherited tax free if you die age 75 or less.

Over 75 and it is taxed as income if they draw it, and untaxed if left as pension in their name.

Gnittih

I have savings/investments which currently will be subject to IHT,..if I use part of this to buy an annuity,will that part of what was my savings be IHT free, or only after 7 years (PET)?

jamesd

A normal annuity isn't part of your estate but there are wrinkles that can apply in your case where the annuity is not a retirement annuity.

If the annuity is to pay income to you it still can be a potentially exempt transfer. IHTM20631 is a useful starting page for annuity issues. Since you're contemplating a purchase with cash the annuity can't be a retirement annuity or pension. Instead it's presumably going to be a purchased life annuity and the rules for those start with IHTM20632. If there aren't any payments to be made after your death then it's exempt. An annuity with a guarantee period could leave the guarantee amount part of your estate, such guarantees say the annuity will pay out for a set number of years even if you die sooner. The capital return part of a PLA isn't considered to be income for the purpose of making gifts out of income and if life expectancy is low this will be most of the annuity payment.

Buying an annuity for this purpose seems unlikely to produce the best result. There are cheaper ways like buying life insurance and paying the premiums using income drawdown - that is, taking an income from the natural income and capital produced by the money. With the annuity likely to pay half of the income from a sensible drawdown plan and with the drawdown pot probably still growing in value in average market conditions you're throwing away a lot of money with the annuity route.

If you consider buying an annuity to pay life insurance premiums on your own life see IHTM14235 with the meat of the rules at IHTM20371. To avoid being caught out by that ensure that the annuity and life insurance aren't linked, say by using different companies for each. But this is still likely to be worse in final result than using drawdown.

Investments in many shares on the UK's AIM stock exchange are exempt from inheritance tax after two years. Need to check the status of each share to find out. So switching sufficient investment money to these types of investment is a potential solution or part of a package of solutions. See Can I save inheritance tax through Aim shares? (direct link)

If you're under age 75 you can make pension contributions and money in a pension pot is outside the estate.

Making gifts out of income is another way of moving money immediately out of your estate. Your challenge is to demonstrate that the capital amount you're considering is actually income. It probably isn't unless it's been recently accumulated from income, say over three years. A drawdown arrangement would presumably have HMRC seeking to argue that the capital part of the drawdown is not income either. But you might consider AIM shares and distributing all of the dividends as income.

You can also consider investing in things that have high income payment rates even if there is a a high risk of capital loss. Income-producing P2P lending can pay 10-12% or more but doesn't have a high risk of capital loss. Even so, 10-12% can move a lot of money out of your estate given enough time and if you invest more than the amount that is affected by IHT. Say you have 100k over the limit, if you were to invest £400k you'd be able to give away out of income something like £45k a year and after two years you'd have given away most of the £100k. Catch here is that you'd probably still have all of the £400k so you'd still have 100k over the limit - you probably wouldn't lose significant amounts of money.

If the annuity is to pay someone else it can be a PET.

jamesd

If the amounts involved are substantial you should really take professional advice.

But without that, you might consider P2P investments to generate income that you immediately use for regular gifts out of income combined with AIM investing that will move the desired capital amount out of your estate after two years.

If life expectancy is shorter than that pension contributions or life insurance might be used.

Keep_pedalling

By buying an annuity it sounds like you expect to live for a good few years yet, so why not give some of this money away now, and cover the chance that you die before the 7 years are up with an appropriate insurance product.

At least that way you actually get to see your surplus cash get out to good use.

atush

Gnittih wrote: »

I have savings/investments which currently will be subject to IHT,..if I use part of this to buy an annuity,will that part of what was my savings be IHT free, or only after 7 years (PET)?

Give away some of your savings now and you only have to live 7 years for it to be 100% exempt from IHT (but you only have to live 3 years for some TR to kick in.)

Do you have some reason to believe you wont live 7 years?
Buying an annuity, which dies with you in most cases) is not a wise option you want someone to inherit your wealth. It might just be the worst option to use.