"Surplus Income" Q

Skwizz · 10 July 2023 at 1:16PM

Hi,

Need your assistance again please.

I have been managing the finances of my 90-year old parents more and more as they have got older.
Understandably their health is failing, particularly in the case of my Father.
My Father used to manage them wholly but they are now almost completely beyond him.
They are fortunate that he has more than secured their current and future needs by those efforts.
But that will leave me and my brother (as sole heirs) liable to more I.H.T. "than we would like".
Their estate is still growing at a rate beyond their needs, along with increasing income.
The income (annuity income, not asset growth/interest) is growing at 5%/year and only about 60% is required to pay bills.
They have no need to touch their assets but, should they ever need to, these are at a level which could provide full-time residential/medical care for the next twenty years and (possibly) beyond.

I have discussed a plan with them and my Brother to 'control' future growth and I.H.T. by reducing their "Surplus Income".
All of my parents' annual pension (annuity) income thus far has been directed so far towards 1) living costs, and 2) investments, via their annual ISA allowances.

It is now proposed that we redirect the surplus of their annuity income via monthly 'gift' payments to me and my Brother.
I believe this will legitimately remove these amounts from their estates and out of an I.H.T. environment, without penalty.

I understand there are three caveats we need to meet for this plan to work:

Such "Surplus" gift payments can only come from my parents' taxable income, net of tax (after their personal rates of tax have been deducted).
Surplus Income payments must be regular.
Payments from Surplus Income must not reduce my parents' standards of living.

I would like some re-assurance that, as well as my understanding of the above being correct:-

Gifts meeting the "Surplus Income" caveats above are free from I.H.T. and that there is no limit to gift amounts or application of the 'Seven Year Rule' under the Surplus Income rule.
We already have an established regular gift payment regime, but only for much smaller allowances accounted for elsewhere (£3,000 + £250 / p.a.). Once these new payments begin, how long do they need to be "established" for to be considered "established"? Can payment amounts be varied once begun (ie. should an unexpected cost arise)?
We do not wish to stop all of my parents' income. We accept there will be some I.H.T. to pay if we want to continue to maintain the security of their health and care in the future. They would still have 60% of their existing and future pension incomes (adjustable, as required) and all of their existing assets while they do not wish to draw upon them. All their costs are clearly and individually evidenced on their two monthly bank statements (1 x credit and 1 x debit).

I think I understand the above and know the answers. I am asking as a final double-check before we make arrangements to put a plan in place for them after receiving contradictory advice from industry "experts".
I realise this is late in the day, but we have already have other I.H.T. arrangements in place for their estate, and this was (possibly) a less 'safe' rule to consider earlier in their lives whilst maintaining their future security.

You guys have helped me a lot with advice on other unrelated issues I've encountered previously.
Thank you in advance for your assistance and patience with me once more.

Grumpy_chap · 10 July 2023 at 3:26PM

Skwizz said:

Hi,

Need your assistance again please.

I have been managing the finances of my 90-year old parents more and more as they have got older.
Understandably their health is failing, particularly in the case of my Father.
My Father used to manage them wholly but they are now almost completely beyond him.
They are fortunate that he has more than secured their current and future needs by those efforts.
But that will leave me and my brother (as sole heirs) liable to more I.H.T. "than we would like".
Their estate is still growing at a rate beyond their needs, along with increasing income.
The income (annuity income, not asset growth/interest) is growing at 5%/year and only about 60% is required to pay bills.
They have no need to touch their assets but, should they ever need to, these are at a level which could provide full-time residential/medical care for the next twenty years and (possibly) beyond.

I have discussed a plan with them and my Brother to 'control' future growth and I.H.T. by reducing their "Surplus Income".
All of my parents' annual pension (annuity) income thus far has been directed so far towards 1) living costs, and 2) investments, via their annual ISA allowances.

It is now proposed that we redirect the surplus of their annuity income via monthly 'gift' payments to me and my Brother.
I believe this will legitimately remove these amounts from their estates and out of an I.H.T. environment, without penalty.

I understand there are three caveats we need to meet for this plan to work:
Such "Surplus" gift payments can only come from my parents' taxable income, net of tax (after their personal rates of tax have been deducted).
Surplus Income payments must be regular.
Payments from Surplus Income must not reduce my parents' standards of living.

I would like some re-assurance that, as well as my understanding of the above being correct:-

Gifts meeting the "Surplus Income" caveats above are free from I.H.T. and that there is no limit to gift amounts or application of the 'Seven Year Rule' under the Surplus Income rule.
We already have an established regular gift payment regime, but only for much smaller allowances accounted for elsewhere (£3,000 + £250 / p.a.). Once these new payments begin, how long do they need to be "established" for to be considered "established"? Can payment amounts be varied once begun (ie. should an unexpected cost arise)?
We do not wish to stop all of my parents' income. We accept there will be some I.H.T. to pay if we want to continue to maintain the security of their health and care in the future. They would still have 60% of their existing and future pension incomes (adjustable, as required) and all of their existing assets while they do not wish to draw upon them. All their costs are clearly and individually evidenced on their two monthly bank statements (1 x credit and 1 x debit).

I think I understand the above and know the answers. I am asking as a final double-check before we make arrangements to put a plan in place for them after receiving contradictory advice from industry "experts".
I realise this is late in the day, but we have already have other I.H.T. arrangements in place for their estate, and this was (possibly) a less 'safe' rule to consider earlier in their lives whilst maintaining their future security.

You guys have helped me a lot with advice on other unrelated issues I've encountered previously.
Thank you in advance for your assistance and patience with me once more.

Do you parents have Power of Attorney in place?
Are you acting under PoA?
Your duty when acting as PoA is to do what is in the best interests of your parent's.
Reducing liability to IHT by gifting funds away from your parents is not in the best interests of your parents. You have to think of how any "official" from the OPG / Council / HMRC would see the action.

You say "me and my brother will be liable to more IHT than you'd like". The good news is that neither you or your brother will be liable for any IHT - any IHT liability arising will be met by your parent's estates before the residual is distributed.

Skwizz · 10 July 2023 at 4:16PM

Thanks for your response, "Grumpy".
I love the UserName and I entirely sympathise with your choice.
If you're ever near Barnstaple in Devon, you might enjoy a visit to "Grumpy's Cafe" if, as I am, you are partial to a proper "Full English".

Yes, my Brother and I both share PoAs for all of my parents' financial and health affairs.
We arranged this well before their health even showed signs of beginning to deteriorate.
Even now they are still mentally cognizant, just too tired to take it on;

My Father went into hospital a few years ago when four life-threatening illnesses all hit him at once.
We were told he would not be discharged several times and so I took their affairs over at that time.
Fortunately for us he confounded his Doctors and resumed control of his financial affairs six years ago.
But he has remained very much weakened and I maintained control of their investments at his request .
I was making a better growth rate for myself and he thought I might be better equipped to do similar for them.*

*In fact, he invests rather differently to me and has requested I continue in that vein for theirs, which I have done.
I could only achieve a growth rate similar to my own by using my strategy, but I digress.

I realise IHT will be due from the estate, but it still reduces what we, as my parents' sole heirs, will inherit.
Without going into too many details or values, my parents estate is worth more than I am used to dealing with and valued at significantly more than their council would ever consider providing support for them from.
I am talking about reducing further income from their pensions which is still being added to the value of their estate, over and above the value it has already achieved.

The estate as it stands today would cover their full medical care needs for about the next fifteen years (sadly this would be unlikely in their current condition), should they ever require it.
Or their regular pension income would provide about 2/3 of it, which is why I'm interested to see if the "regular payments" could be varied, should they need this later.

Their pension income currently continues to grow at a guaranteed annual rate of 5% and this continues until they cannot draw it any more.
My Father bought annuities from day one with this in mind and is/was fully aware that it would create a surplus at some point, if they survived for long enough.
That point arrived about ten years ago, since when they have seen net profit.
But, similarly, they have gone through another turning point and now the longer they survive, the less they need to continue to survive.

I feel like a character from Dickens trying to rob his relatives already, so I am aware of my responsibilites to my parents as their eldest son and the obligations of their PoA.
There will still be monies to the Exchequer from their estate, but they want to reduce that as much as their entitlement allows so my Brother and I can inherit more of their wealth (legitimate means only), as do my Brother and I.

Grumpy_chap · 10 July 2023 at 4:21PM

Skwizz said:

Without going into too many details or values, my parents estate is worth more than I am used to dealing with and valued at significantly more than their council would ever consider providing support for them from.

In that case, it sounds as though your parents would benefit from professional advice around estate planning.
This would probably need to be initiated by your parents, but you describe that they are competent at present so there is not reason they should not do so.
Any actions taken via that route at least have the benefit of being sanity checked for breaches of rules (real and perceived).

Daniel54 · 10 July 2023 at 5:40PM

As Grumpy Chap suggests,this is not something that you can initiate or put in place under your attorney powers so it will need to be at the behest of your parents.Taking off your attorney hat,I can see no reason why you could not be involved in discussions with them as a son

I think it would be prudent to have an accountant and/or an IFA to run the numbers,both to verify the surplus income and to provide confidence to your parents.

I suggest also that ,belt and braces,it might be helpful to have a solicitor document the arrangement

if you parents are not taking regular tax free income from the ISAs ,then that should be put in place

it sounds like there is plenty of headroom,but inflation is reducing the real terms value of he 5% per annum uplift

Jeremy535897 · 10 July 2023 at 5:43PM

It can be tricky to justify gifts using POAs. The best place to study the details of normal expenditure out of income is HMRC's inheritance tax manual, starting here:
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14231

Skwizz · 10 July 2023 at 7:21PM

Thanks Jeremy.
That looks like quite a read with all of it's follow-up links.
Should keep me busy for a few days.

Hi Daniel, agreed.
It is the result of a conversation some time ago about reducing the I.H.T. so I and my Brother would receive more of the estate they want to leave us (they've already paid tax once on it, after all).
I find that I am having to view my parents in two lights; emotionally and emotion less (for the estate) in order to, as I see it, serve their best interests and also those of the rest of our family.

Thanks Grumpy.
I take your point.
I had hoped I might avoid that because of the conflicting 'professional' advice they've already received over quite some years and all the different rule changes that come and go.
I also don't think the cost of advice for the size of their estate would be welcomed by them at this late stage, although everyone else might consider it to be the best course of action.
40% IHT on what hasn't already been protected might be financially preferable to a 3-5% fee on the whole estate as it stands.

When I discuss things like this with my Father I can condense it into suitable chunks that he can cope with and give it to him at a time when I think is best for him to receive it.
A professional would not be able to do that and certainly not consider my Father's interests in the same way anyone in his family might.
My Mother is much more 'together', but won't get involved at all, as he has always taken care of all of it for her (despite her having a professional background in finance, lol).

Grumpy_chap · 10 July 2023 at 8:22PM

Skwizz said:

I also don't think the cost of advice for the size of their estate would be welcomed by them at this late stage, although everyone else might consider it to be the best course of action.
40% IHT on what hasn't already been protected might be financially preferable to a 3-5% fee on the whole estate as it stands.

When I discuss things like this with my Father I can condense it into suitable chunks that he can cope with and give it to him at a time when I think is best for him to receive it.
A professional would not be able to do that and certainly not consider my Father's interests in the same way anyone in his family might.

The cost of professional advice should be far lower than the value it gains.
The fees you reference seem excessively high - are they fees for a Financial Advisor? That is not the service you require in this situation.
You should be able to engage the appropriate professional service on a time-based fee, not a proportion of estate fee.

I also disagree with the way you have dismissed the abilities of the appropriate professional.
You need to find a support that is experienced in dealing with people of your parent's age and their preferences.
Having an appropriate professional involved can also allay any concerns that your parents (or external individuals) might have about you doing what is in your interests rather than your parents. It is real concerns and perceived concerns in this regard.

When my father was in a similar position, we learned a lot initially from a charity that was running a free seminar. There may be something similar in your area. From that seminar, the charity were able to link to other organisations that were appropriate and experienced in the necessary support for people of your parents age. Some of these charities are associated with various medical conditions, but the information they can share is relevant whether or not the medical condition applies.
For reference, the local charity that we contacted are https://pathwaysthroughdementia.org/ - you may be able to locate something similar in your area.

Daniel54 · 10 July 2023 at 8:37PM

A few points

Those of us commenting are left guessing as to how much your parent’s joint estate exceeds £1m.It is absolutely fine that you do not divulge this

Your parents have not paid a penny of tax on the capital gain on their joint property

As they are in their 90s ,the reality is that estate planning options are limited ( as these normally involve giving away capital sums under the 7 year rule ) .Distributing excess income seems a a viable option
,from what you have said

Final observation.From my experience dealing with late close relatives.They worry about having having enough money to cover their needs,That worry may be misplaced,but it is nevertheless very real to them.

So in their interests it it is preferable that they have too much rather than too little,

Linton · 15 July 2023 at 11:14AM

Your authority as an attorney to make gifts is limited:

See https://publicguardian.blog.gov.uk/2020/12/16/giving-gifts-as-an-attorney-or-deputy/

If you wish to make gifts to yourself or others as an Attorney for tax planning you should have the permission of the Court of Protection.

See
https://www.lawskills.co.uk/articles/2018/09/tax-planning-in-the-court-of-protection/
https://www.wilkes.co.uk/court-of-protection-iht-planning-incapacitous-individuals/
https://www.clapham-collinge.co.uk/news/court-of-protection-limits-iht-planning
https://theprogenygroup.com/blog/iht-planning-through-an-lpa/

Sea_Shell · 15 July 2023 at 11:45AM

Surely if the donor still has capacity to agree to any gifting, just the act of using the poa to facilitate acting on their wishes is not against the rules?