Passing savings to children to minimise Inheritance Tax

redux

18cc wrote: »

You can give as much as you want when you want completely tax free to your children, with the proviso that if you die within 7 years there will be (some) inheritance tax to pay. If you survive 7 years then no tax payable.

bostonerimus wrote: »

That's what I was thinking. A whole life policy seems to be unnecessarily expensive when all you need to do is to insure for IHT taxes due on death within 7 years of the gift, so a less expensive term policy and gifting seems appropriate. Of course this needs you to actually gift the money. I've always avoided whole life because of the high premiums and you have to keep paying them until you die and that might become a burden as you get older. Just give the kids lump sums and take out inexpensive term life insurance for 7 years to pay for the tax bill if you die within 7 years of the gifts.

Tom99 wrote: »

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).

I think there may be scope for combining these 3 bits of advice - do the potentially exempt transfers, take out term insurance that tapers downwards for 7 years, and pay the insurance premiums yourselves as part of gifts out of surplus regular income.

I'd be wary of giving away most of the investments and having mostly just the house remaining though. For one thing the income will have dropped a lot. That might be why certain types of trusts are worth considering, for instance give away capital but retain the income. Also if one person later needs to go into care, the house might have to be sold and turf out the other. Is moving to a more modest home soon to release some of that value before the giveaway a possibility?

My sister's in-laws both have dementia and were buying into an apartment attached to a care home a few months ago. They'd already given quite a bit away to the grandchildren, and they almost had to temporarily borrow some of it back but eventually a bridging loan was managed.

Robert_McGeddon

OP,

With combined assets of £1.5 million and an IHT allowance of £1 million you have a potential IHT liability of £200K as of today (well, as of 6 April when the RNRB hits £175K). That means £1.3 million could be passed on to your heirs. This is a very tidy sum and I'm sure would be greatly appreciated downstream. Sure, passing on more would be good but you have to balance out the effort and stress involved.

You should perhaps consider what the numbers might look like in 5, 10 or 15 years time. You’d have to make some assumptions about income and spending, inflation and IHT rate/threshold. But if the amount of IHT is increasing as a percentage of your total of your estates then you have a bigger problem going forward than you have at the moment. And if the percentage is decreasing you have a lesser problem or perhaps none at all – in which case it’s not a worry after all.

If the IHT cut is increasing with time then presumably your projected income is exceeding projected spending. As Tom99 said in post #12 regular gifts out of surplus income are not subject to IHT. You would need to keep fairly detailed records to substantiate this – but the IHT mitigated could be substantial and of course the gifts appreciated!

Tom99 also mentioned pensions. Pensions are generally disregarded for IHT. If your current assets include DC pension pots you should deduct them from your total assets for IHT purposes. It almost certainly makes sense for both you and your wife to be making contributions to a SIPP/pension up to the age of 75 from the tax year 2019/20 both for the favourable IHT position and income tax refunded. Contributions after age 75 may also be worthwhile.

bostonerimus

I'm in the US and I'm having to think about inheritance for my nieces and nephews and their kids as I don't have any children of my own. They all live in the UK which makes things a little more complicated, but not much. I'm bumping up on Federal estate tax limit and I'm well over my state estate tax threshold just on the value of my home so the long term plan is to downsize to free up that capital so I can gift it to my heirs and charity.

In the US the gift tax limits are far more generous than in the UK. I can give $15k per person per year without having to pay any gift tax. So I have 3 nieces and their husbands and they each have 2 kids, so that's 12 x $15k = $180k that I can give to the family each year. I don't give them nearly that much yet as I'm still quite young, but when the state pensions start at 67, I will have more than enough income and so I plan to start giving capital away aggressively. As I age I'm sure the house will become a chore and I will sell it and move into an apartment that I think I'll just rent so that I don't have to worry about maintenance and I can keep the value of my estate below the state tax threshold easily and still be very comfortable.

Tom99

Robert_McGeddon wrote: »

Tom99 also mentioned pensions. Pensions are generally disregarded for IHT. If your current assets include DC pension pots you should deduct them from your total assets for IHT purposes. It almost certainly makes sense for both you and your wife to be making contributions to a SIPP/pension up to the age of 75 from the tax year 2019/20 both for the favourable IHT position and income tax refunded. Contributions after age 75 may also be worthwhile.

Yes I suppose contributing to a pension could be used as a IHT planning tool even if you don't get the tax top up, after age 75 or over £2,880pa for a non-earner.
£100 into a pension would be a £100 pension pot. If you drew down during your lifetime you would only get £85 back but if left the £100 is immediately IHT free.
The beneficiary might have to pay tax if you die age over 75 but even if they were a 40% taxpayer they are no worse off that paying the IHT on the £100.
In the meantime the £100 can accumulate tax free, handy if you already use your £20,000 ISA limit and are over the £2,000 tax free dividend limit.

Malthusian

Tom99 wrote: »

Yes I suppose contributing to a pension could be used as a IHT planning tool even if you don't get the tax top up, after age 75 or over £2,880pa for a non-earner.

Not a very good one. You are moving money that has already been taxed into an environment where it will be taxed yet again if you take it out. That suggests you don't plan to ever take it out. In which case why not just give it to your heirs?

If you don't want to give it away, the next thing to look at would be investments qualifying for Business Property Relief.

Both of these options potentially result in 0% tax on the beneficiary if you live long enough, whereas with a pension they will pay income tax if you die after 75.

By moving already taxed money into a pension without tax relief, you are also running the risk that the Government makes pensions less attractive as an inheritance tax vehicle, e.g. by restoring a tax on death benefits of the kind that existed until George Osborne removed them in 2015.

The OP should refer again to post #7.

Malthusian

Robert_McGeddon wrote: »

If the IHT cut is increasing with time then presumably your projected income is exceeding projected spending.

Not necessarily. Could be capital growth, and gifts out of capital growth don't get an exemption.

Tom99 also mentioned pensions. Pensions are generally disregarded for IHT. If your current assets include DC pension pots you should deduct them from your total assets for IHT purposes. It almost certainly makes sense for both you and your wife to be making contributions to a SIPP/pension up to the age of 75 from the tax year 2019/20 both for the favourable IHT position and income tax refunded. Contributions after age 75 may also be worthwhile.

If the OP and his wife are not working they can only pay £3,600 gross into a pension per year and get tax relief. Which is tinkering at the edges when discussing six-figure IHT liability.

For contributions after age 75 see my previous post.

Mojisola

Zanderman wrote: »

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"

Malthusian wrote: »

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

If the couple keep a good bit of the cash back for their own needs, they will have the option of funding good care in their own home (if/when they need it). That can be the preferred option for many people and definitely delay going into residential care.

harrypeters

Mojisola wrote: »

If the couple keep a good bit of the cash back for their own needs, they will have the option of funding good care in their own home (if/when they need it). That can be the preferred option for many people and definitely delay going into residential care.

That's pretty much my thinking, as the OP. Despite the wish to give most of the assets (house apart - and even that might be the subject of a discretionary trust if it makes sense) to the children, there will be enough kept back for other eventualities, and, facing facts, it's not going to be an indefinite stay in a care/nursing home or long-term care in our own home.


Our present income from pensions (all secure and index-linked) is substantially more than we need to live quite comfortably on, though I appreciate that it might not cover care in the home, when needed.


There's a further point in all this, and it was a remark by a good friend the other day that sparked it all off: "The only people that need to worry about Inheritance Tax are the ones that don't trust their family".


He's right. And since we do trust our family to do the right thing by us if we ever need it (voluntarily of course, or the gifts aren't gifts for IHT purposes) we're happy to hand it over. They've already had a fair bit to help with house purchases over recent years, and chances are they'll simply invest the additional gifts for their own children. It's a good position to be in, for us and for them, I admit that, but in this situation I feel pretty confident that making gifts now is a better option than waiting until I'm dead and having £200,000+ disappear into the hands of HMG.

harrypeters

Zanderman wrote: »

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 comment was made in respect of the Local Authority deprivation of assets rules - it's entirely possible that we'll need care at some point, either at home or in a care/nursing home, but since that's not in prospect at the moment it's not something that can be used by the local authority to attack any gifts made. If it were in prospect, they could claim that the gifts had been made to avoid care home contributions.


I'd add that giving everything to the children doesn't preclude them from handing some back again should it ever be needed - though obviously that would be their decision, and not ours. But I trust them.

Tom99

harrypeters wrote: »

That's pretty much my thinking, as the OP. Despite the wish to give most of the assets (house apart - and even that might be the subject of a discretionary trust if it makes sense) to the children, there will be enough kept back for other eventualities, and, facing facts, it's not going to be an indefinite stay in a care/nursing home or long-term care in our own home.

Our present income from pensions (all secure and index-linked) is substantially more than we need to live quite comfortably on, though I appreciate that it might not cover care in the home, when needed.

There's a further point in all this, and it was a remark by a good friend the other day that sparked it all off: "The only people that need to worry about Inheritance Tax are the ones that don't trust their family".

He's right. And since we do trust our family to do the right thing by us if we ever need it (voluntarily of course, or the gifts aren't gifts for IHT purposes) we're happy to hand it over. They've already had a fair bit to help with house purchases over recent years, and chances are they'll simply invest the additional gifts for their own children. It's a good position to be in, for us and for them, I admit that, but in this situation I feel pretty confident that making gifts now is a better option than waiting until I'm dead and having £200,000+ disappear into the hands of HMG.

Putting the house into a discretionary trust will not work for IHT purposes if you still live in the house. In order for the assets put into the trust to start the 7yr ball rolling the settlor cannot receive any benefit, income or capital, from the trust.