Passing savings to children to minimise Inheritance Tax

Tom99

You could also consider gifts from surplus income which avoid IHT straight away rather than wait 7yrs (providing you can demonstrate an intention to make regular gifts from income).
Also, if age under 75, set up a SIPP or other type of pension, even if it's only the net £2,800 you can put in as a non-earner. SIPP is free of IHT straight away and free of any tax on the beneficiary if you die before age 75. After age 75 the beneficiary is taxed at their marginal income tax rate if they drawdown the pension but even if your beneficiary is a 40% taxpayer they will still get 25% more net than just leaving the money in your will. If you die before age 75 they will get 108% more, £125 for every £100 you put in the SIPP rather than £60 after 40% tax on the £100 left as cash.

dmelife

A whole of life policy may not be appropriate for the OP but for someone whose liability is too large to be solved through gifting alone, they are a possible solution. Particularly when combined with the gift from excess income rules and held in trust as this provides immediate relief from IHT. Premiums can also be paid by children if affordability is an issue in the future.

harrypeters

As the OP, I'd like to thank people for their helpful and thought-provoking posts so far.

Just to add to the bare bones, and provide a bit of context, the sums involved, and my age (early 70s) make early action important - regular annual gifts from income won't take me too far. My wife is a couple of years younger than me, and our total assets amount to around £1.5m, including a £700k private residence and stocks and shares ISAs. I'm embarrassed to mention these figures (I know it's a nice problem to have) but they're needed to illustrate the scale of the 'problem'.

I know I could seek professional advice, and I might yet do that, but if the plan is simply to gift the money (not the house) to children (whom I trust absolutely) it might prove an unnecessary additional cost.

Discretionary trusts seem unnecessary in my situation and bring their own problems, but ideally I’d like to be able to keep the ISAs and Savings Certificates intact, just as they are. The bare trust idea mentioned above sounds attractive, in that I could create such a trust (or trusts) very simply and cheaply so that the shares in the ISA and the Savings Certificates became beneficially owned by my children as of now. No IHT implications, but I’d need to live for 7 years for the full benefit to accrue. My executors (the children) would be aware of the trusts and would be able to pull in the assets in the normal way, as executors, but then pay them over to the beneficial owners – themselves – because of the bare trusts.

This seems a very simple solution, but is there a drawback I’m missing?

We haven’t even mentioned care home fees, but that’s another very obvious issue. No prospect of either of us needing one at the moment, or for the foreseeable future, and for that reason I’m pretty confident that the local authority can’t later use the deprivation of assets rules to include the assets transferred. Having said that, we’ll still have the £700,000 house, so it’s probably irrelevant anyway. That could, as things stand now, probably be dealt with by a discretionary trust, but maybe that’s an entirely different question!

Tom99

harrypeters wrote: »

I’d like to be able to keep the ISAs and Savings Certificates intact, just as they are. The bare trust idea mentioned above sounds attractive, in that I could create such a trust (or trusts) very simply and cheaply so that the shares in the ISA and the Savings Certificates became beneficially owned by my children as of now.
This seems a very simple solution, but is there a drawback I’m missing?

I very much doubt that you can put anything in an ISA into a trust. It is after all an Individual Savings Account with tax benefits to the individual. I expect you could write a trust deed purporting to put these assets into the trust but that HMRC would claim, when your children come to apply for probate, that either the trust itself was invalid or that the transfer of assets into the trust did not happen because the assets were held in an ISA.
I don't think you can have your cake and eat it, claiming the assets are not yours but you would still like the beneficial tax treatment.

dmelife

Are you ready to gift several hundred thousand when your wife could survive a further 25yrs? What will her income be when you pass away? Why do you want to retain the savings certificates? Just because they are appropriate for you doesn’t mean they would be the best investment for your children. If it is a bare trust, they could immediately sell the assets anyway so what is the point of the trust? It’s usually used for minors to control assets prior to age 18. Also you can’t place an ISA in trust.

Malthusian

dmelife wrote: »

A whole of life policy may not be appropriate for the OP but for someone whose liability is too large to be solved through gifting alone, they are a possible solution.

They're not a solution, they're a way of spreading the cost. The cost is still there. On average you would expect to pay more in premiums and opportunity cost than the amount the insurance pays out, as that's how insurance works. A solution would be something that eliminates the tax bill, like gifts that don't become failed PETs or an investment qualifying for Business Property Relief.

Insurance is generally a rip-off for anything you can self-insure against. This includes mobile phone insurance, extended warranties and whole of life insurance in the absence of a reason not to simply pay the IHT charge from the estate.

A deceased's estate is generally self-insured by definition, as if it can't afford an IHT bill it doesn't have one.

WOL insurance can be useful when there is a reason not to pay the IHT bill from the estate, e.g. the beneficiaries don't want to sell the family home that makes up the bulk of the assets.

I echo the urging to see a regulated Independent Financial Adviser.

The above posters are correct, to give funds currently in ISAs into a trust you have to remove them from the ISA. An ISA wrapper can only be used for funds in your own name.

As the OP is happy to give his funds directly to his children there is no obvious need for a trust based on the information given. A trust is something you use when you don't trust the beneficiaries (e.g. because they are drunken wastrels, or minors legally incapable of being trusted); the OP does.

As the children are not minors a bare trust is redundant.

I am not sure it is possible to transfer Savings Certificates to another; if not NS&I might require you to sell them and give the kids cash.

Alice_Holt

I also agree with the comments that the OP may wish to get regulated professional advice.

FWIW, my approach has been to steadily make payments (mainly out of income) over a number of years to my nieces.
Firstly into a S&S Bare trust from their birth to age 14;
From 13 to 18 into a savings account (which they could use at uni, etc);
A weekly standing order through their uni years to help with living costs;
For about 10 years I have also been funding a SIPP for them (see post 12), contributing £240 each month.
Now they are in their early / mid 20's this has given them a very healthy financial foundation.


Personally, I'm more concerned to ensure I have the necessary funds for good care in older age (and to enjoy my retirement), than I am to avoid IHT.

Zanderman

Alice_Holt wrote: »

....Personally, I'm more concerned to ensure I have the necessary funds for good care in older age (and to enjoy my retirement), than I am to avoid IHT.

Indeed - worrying about IHT when you still have many years, possibly decades, ahead of you always seems rather odd to me. We should (all of us) be looking to maximise our own quality of life - especially in the uncertainty of old age - and try to have assets sufficient for this.

Which might be most, or even all, of your current assets.

As the OP is 'early 70s' and his wife is a little younger, they might live another 30 years each yet. And might really need that £1.5M for themselves.

The OP says, of care homes, "no prospect of either of us needing one at the moment, or for the foreseeable future" but that is, if I might be so bold, utter tosh. No-one can predict what might be just round the corner. Serious illness or disability - physical or mental - doesn't have to give any notice upfront and becomes more and more and more likely when elderly. And decades of decent care (not local authority-funded) costs mega bucks. .

The £700k value of the house the OP suggests retaining may well be insufficient. At £1000 per week for a non-nursing care home, that would be 700 weeks or 13 years, so if both went into such care it would be enough for just over 6 years each, and that's non-nursing care, nursing care would cost a lot more,

Keep_pedalling

harrypeters wrote: »

As the OP, I'd like to thank people for their helpful and thought-provoking posts so far.

Just to add to the bare bones, and provide a bit of context, the sums involved, and my age (early 70s) make early action important - regular annual gifts from income won't take me too far. My wife is a couple of years younger than me, and our total assets amount to around £1.5m, including a £700k private residence and stocks and shares ISAs. I'm embarrassed to mention these figures (I know it's a nice problem to have) but they're needed to illustrate the scale of the 'problem'.

I know I could seek professional advice, and I might yet do that, but if the plan is simply to gift the money (not the house) to children (whom I trust absolutely) it might prove an unnecessary additional cost.

Discretionary trusts seem unnecessary in my situation and bring their own problems, but ideally I’d like to be able to keep the ISAs and Savings Certificates intact, just as they are. The bare trust idea mentioned above sounds attractive, in that I could create such a trust (or trusts) very simply and cheaply so that the shares in the ISA and the Savings Certificates became beneficially owned by my children as of now. No IHT implications, but I’d need to live for 7 years for the full benefit to accrue. My executors (the children) would be aware of the trusts and would be able to pull in the assets in the normal way, as executors, but then pay them over to the beneficial owners – themselves – because of the bare trusts.

This seems a very simple solution, but is there a drawback I’m missing?

We haven’t even mentioned care home fees, but that’s another very obvious issue. No prospect of either of us needing one at the moment, or for the foreseeable future, and for that reason I’m pretty confident that the local authority can’t later use the deprivation of assets rules to include the assets transferred. Having said that, we’ll still have the £700,000 house, so it’s probably irrelevant anyway. That could, as things stand now, probably be dealt with by a discretionary trust, but maybe that’s an entirely different question!

Financially we are in a similar situation to you, and feel fortunate that we will never have to rely on LA funding should either of us need care. If the worst happens then our preference would be to receive care in our home from live in careers, which would require significant funds so that takes priority over reducing IHT to zero.

Over the last 8 years we have given significant amounts to our children, but have ended up back where we started as our investments have replenished our gifts by a roughly equal amount.

We are now funding nursery fees for our oldest grandson, so I think we should now be looking at a discretionary trust for the GC.

Malthusian

Zanderman wrote: »

And decades of decent care (not local authority-funded) costs mega bucks. .

But is also vanishingly rare. The average stay in a care home is two years and while there is a very long tail, the number of people who live in care "for decades" is tiny (and most of that subset would have spent their whole lives in care, not just old age). Going into care is the beginning of the end.

This does not mean that if you have enough money for two years of care you are sorted, it means that the possibility you are in care for decades should be given due weight.