Surprise 'inheritance' (IHT insurance paying out early)

Skwizz

Following on from another thread (https://forums.moneysavingexpert.com/discussion/6458938/surplus-income-q/p1), this question is not really related to it, so I'm starting a new one.
It should also help visibility for anyone facing a similar case.

My Father has just passed away.
He has made significant plans to deal with the I.H.T. on his estate and took out an insurance policy to cover my Brother and I against a chunk of it, which would become due on my parents' estate upon the death of the last survivor.
The policy itself is of a kind to fall outside the estate and therefore is not subject to any I.H.T. in and of itself.

That's what he always told us!
But that turns out to be incorrect in one rather significant detail:-

I am winding up his affairs and, as such, have had cause to notify the policy provider, thinking it would just be transferred into my Mother's name, as with all his other investments (and following the wishes he expressed in his Will).
But the policy provider has advised me that the policy was set up to pay out to my Brother and I upon my Father's death, regardless of which parent was the final survivor.

His Will was initially prepared in the nineties and updated in accordance with various changes to the law. It sets out the order of inheritance as from my Mother to my Father or vice versa, depending on the order of survival, and then to be shared between myself and my brother after both parents have died.

So this policy, which we were told had been designed to offer some protection from IHT after both parents' death, is paying out NOW.

We will still need the funds to use for their designed purpose at some point (remembering that my Mother is still alive and, hopefully, still has a good many years left in her yet), so it would be unwise to spend any of this money yet as we will need it later.

MY QUESTION:-
What the hell do I do with it?

Fyi - I'm looking at splitting two equal shares of £175k (say £87k) with my Brother after we both have our own financial affairs pretty well planned well into our futures.
I have an idea what he will do with his half.
I am somewhat different as he is more 'comfortable' than I and will be able to deal with more of an IHT concern without this. He also has children he can direct excess to, which I do not.

So I'm asking about my own future and affairs.
I can add £20k to next year's ISA allowance and just noticed that I haven't used this year's yet, so that's £40k, although I will have to wait five months to use half of that.
I also have £2,880 I can contribute to my SIPP in the next tax-year, which I have been drawing.
I believe I can put up to £50k into Premium Bonds, though I'm not a fan of those, nor convinced that would be the best use of £50k.

That protects it from our lovely U.K. Taxman but am I thinking along the right lines, or should I be thinking elsewhere? If my Mother survives a long time, her estate will continue to grow and I will need this money to continue growing as well.

Sorry if this is a lot and rambling, but it's a bit of a surprise that I wasn't expecting to have to worry about for a few more years yet and I only found out an hour ago.

Skwizz

Sorry, in case it's relevant, I forgot to mention; The policy was written into a Bare Trust, more than seven years ago in 2015, so it's just fallen outside the 'seven year rule'.

Brie

I very much doubt this would count as income for you so don't think you need to worry about any tax implications at this point.  yes you want to tuck it away to grow into something of more value in the future.  £50k in premium bonds is a safe haven for the short term at least - no interest but maybe a win?  

Albermarle

Your question is more of a ' I just inherited £XK and I do not know what to do with it'

So this question is best reposted in the Savings and Investments forum, without all the detail about insurance policy, IHT etc
IN addition to the info you mention about ISA's you should include your attitude to investing rather than saving, your age and what current income you have or may have in the future.

Skwizz

Thanks guys.
I am 63 and retired 9 years ago.
I have no offspring, dependents, or debt.

I invested my savings so that I can live off the maximum I can draw from my SIPP each year while staying under my tax-free income allowance and add my 25% each year.
I top that up to whatever else I need during the year from stocks and shares ISA allowances I have been using up over the years.
I have secured my basic income safety-net and am looking to keep the rest invested to grow.
If I use the two immediate ISA allowances, I am happy to keep drawing from anything else I put into Premium Bonds each year and do the same.

Yes, it is a 'what to do with it' question.
I don't like (or see the point) in Premium Bonds .
They'd be like buying a lottery ticket, except I get to keep the original capital.
I would rather be pointed toward something else (entirely legitimate though) where I can get profit but still keep that protected from tax.

I have differing attitudes towards risk:-
I invest in a pyramid format where the bulk of my savings make up the base level which is safe and secure and can support higher levels.
The next layer is smaller and has a slightly higher risk.
Right to the top level which is the smallest layer and has the highest risk.
My risk considers what I can afford to lose, but I'd rather not realise that loss.

theoretica

Skwizz said:

We will still need the funds to use for their designed purpose at some point (remembering that my Mother is still alive and, hopefully, still has a good many years left in her yet), so it would be unwise to spend any of this money yet as we will need it later.

Why will you need this money on your mother's death, rather than paying the IHT in the normal way from her estate?  Is most of the estate a family home or something you will want to preserve with your brother, or are you just thinking that this money was intended to pay IHT and so it should be done that way?  Most people deal with IHT without an insurance pay out.

Keep_pedalling

theoretica said:

Skwizz said:

We will still need the funds to use for their designed purpose at some point (remembering that my Mother is still alive and, hopefully, still has a good many years left in her yet), so it would be unwise to spend any of this money yet as we will need it later.

Why will you need this money on your mother's death, rather than paying the IHT in the normal way from her estate?  Is most of the estate a family home or something you will want to preserve with your brother, or are you just thinking that this money was intended to pay IHT and so it should be done that way?  Most people deal with IHT without an insurance pay out.

I have to agree, assuming her house is worth more than £350k her estate will have to exceed £1M before any IHT is due, so plenty in the estate to pay any IHT due.

Although the policy is paying out on his death rather than on the second death the effect of it is basically the same the OP may get less when their mother dies but gets something now to compensate. As the OP has no dependant children and is likely to be in IHT territory by the time they die, perhaps rather than worry about their own IHT liability instead.

Albermarle

Yes, it is a 'what to do with it' question.
I don't like (or see the point) in Premium Bonds .
They'd be like buying a lottery ticket, except I get to keep the original capital.
I would rather be pointed toward something else (entirely legitimate though) where I can get profit but still keep that protected from tax.

If your only taxable income is the money from the SIPP and it is £12570 presumably, then you can take advantage of the £5000 savings starter rate and the £1000 personal savings allowance. So you can earn up to £6000 in interest per tax year without paying tax.

This will be reduced down to just £1000 when the state pension starts to pay out ( assuming you keep drawing from your SIPP) So in the meantime continue to transfer £20K pa into a cash ISA each tax year.

That assumes you are only interested in cash savings, not investing more for the long term.

Skwizz

theoretica said:

Why will you need this money on your mother's death, rather than paying the IHT in the normal way from her estate?  Is most of the estate a family home or something you will want to preserve with your brother, or are you just thinking that this money was intended to pay IHT and so it should be done that way?  Most people deal with IHT without an insurance pay out.

I was under the impression (maybe mistakenly?) that IHT was to be paid before anything could be removed from the estate and so separate funding would be required to do that, but could be replaced after Probate had been granted by funds released from the estate (not in my Father's case as my Mother inherits his part of the estate automatically and without any IHT due).

The insurance policy would still only pay part of the IHT due as the whole estate will be valued around £1.8m (50/50 between the house and income producing investments). I hope to have my Mum for some years yet, but that means the estate may grow to around £2m and have that much more IHT liability.

I am already using my annual income tax allowance of £12,575 to draw just that amount from my SIPP, adding my 25% tax free lump sum, as the basis for my annual pension withdrawal. I top that up from an ISA I've grown, and prioritised above my SIPP over the years, so all of my annual income is now free of any income tax and CGT liability.
When my state pension begins I will stop using my SIPP entirely at whatever level it's reached and just grow it for my own heirs.

As far as the money from insurance policy goes, I am only interested in having it keep pace with the estate. If I can use capital from the estate, other than the house, to settle Probate, then the insurance money becomes irrelevant to the purpose for which it was designed and can be used for other things. In that case I would direct it toward continuing to grow my ISA each year and add to my tax-free income. I don't want to do that if it can't be used in that way:- If I have to withdraw the capital from an ISA to settle Probate one day, then I won't be able to replace those year's contributions and would lose four and a bit ISAs.

Grumpy_chap

Skwizz said:

Yes, it is a 'what to do with it' question.

I have differing attitudes towards risk:-
I invest in a pyramid format where the bulk of my savings make up the base level which is safe and secure and can support higher levels.
The next layer is smaller and has a slightly higher risk.
Right to the top level which is the smallest layer and has the highest risk.
My risk considers what I can afford to lose, but I'd rather not realise that loss.

Would it not be logical to just add this additional capital now received to the existing risk-pyramid investments, distributed appropriately for each layer of the pyramid?

I don't understand your dislike of Premium Bonds, they seem like an obvious first target for maximising to me.  Each to their own.

It actually seems quite odd, to me at least, that this insurance policy paid out now in any case. 
With everything left from your Father to your Mother then there is no IHT at this stage (assuming they are married).
There is no certainty that the Estate will remain in IHT territory when your Mother passes.  She may have spent sufficient on care needs, holidays, enjoying life to the fullest that she can such that the remainder is below the threshold by the time that event is reached.
I am sure the insurers have not paid unless they were certain the liability was due.

Skwizz

Grumpy_chap said:

It actually seems quite odd, to me at least, that this insurance policy paid out now in any case. 
With everything left from your Father to your Mother then there is no IHT at this stage (assuming they are married).
There is no certainty that the Estate will remain in IHT territory when your Mother passes.  She may have spent sufficient on care needs, holidays, enjoying life to the fullest that she can such that the remainder is below the threshold by the time that event is reached.
I am sure the insurers have not paid unless they were certain the liability was due.

You and me both. lol.
The family had been told it was for IHT and, like you, assumed it would pay out on the death of the last survivor.
It was only when I rang the insurance company on Wednesday to notify them of my Father's passing that I was told, "Nope. It pays out on your Father's death. Your Mother is not mentioned."

That's why I'm suddenly having to adjust my thinking, having had all my own financial ducks in a line for years.
But there are a lot of things like that coming out of the woodwork now, I actually find it all very interesting and quite amusing. Hopefully that's just what was in his mind when he was arranging it all.


When any money comes to me, it is incorporated to my existing investment plan.
I've been managing their financial affairs (in the manner I believe my Father would continue had he been able) and my Mother is covered for significant care levels over a period that will easily exceed her demise and still leave a large portion in her estate. I should add that both my Brother and I are the only heirs and we are both in a financially comfortable position. Inheriting this estate is not foremost in our minds. We've been telling them both to enjoy it themselves for years, but you know what parents can be like.

I don't like 'gambling' with things like the lottery; crypto; or premium bonds. I understand I will still have access to the original capital, but I just don't understand the point of them. There have been numerous studies that demonstrate how they even don't keep pace with inflation overall. You have to be very lucky to do better. The only benefit seems to be if you do think you can profit, that profit is hidden from tax.

Having said that, I think I have a plan in mind now and will use PB's after using my ISA allowance for this year and next. Then I'll recover £20k from the PB's to cover the next year's ISA allowances. I may have to draw them out later but them's the breaks and it's another "first world problem".