How do you avoid higher rate tax on savings interest

saverspavers61

Hoping for some further advice on a topic which has been previously posted but now closed.

I have a significant amount of money in savings accounts generated from selling my home. I’m currently in private rented accommodation waiting for the housing market to cool before once again purchasing a home. The funds are in excess of £250,000 and is currently earning over 5% across a number of easy access accounts.

As a higher rate tax payer, I’m paying over 40% on the interest which I would like to avoid. Apologies in advance to anyone who believes that may be morally questionable.

My parent is retired and in receipt only of a modest private pension (pre state pension age) and the vast majority of their personal allowance is unused. My other parent is still working in a high income job so supports them both financially.

To reduce my tax burden, my intention is to transfer all of my funds to my parent who will subsequently earn interest on the funds. At a future date, likely in 18 months, they will transfer all funds and accrued interest back to me.

Firstly, I would like to know if this is a legal way of avoiding tax?

What are the risks of following the above approach in terms of any income and/or inheritance tax liability in future?

The risks I would like to exclude here is that 1) they would simply refuse to return the funds and 2) if I were to pass away myself within 7 years of initially transferring the funds.

My parent is in good health and fully expect they will still be with us in 7 years from the date of returning the funds to me. That being the case, if 7 years passes, is there any tax liability on me whatsoever?

However, if they were to pass away within 7 years, is my only exposure the potential for inheritance tax to be applied?

Regarding inheritance tax, as my parents are married am I correct in thinking that 1) their full estate could be transferred to my other parent with no inheritance tax liability (including the £250,000 which I have sent them) and 2) my parent who received the funds from me would be able to return the ~£250,000 to me as part of their estate and there would be no inheritance tax due as the value is below £325,000? They have no other significant assets to speak of other than those held jointly as a married couple.

As a side note, I’m surprised about how little information is available about this topic on .gov websites. While there is plenty of information around transferring to a spouse there is very little about transferring to a parent with the express intention of transferring it back at a future date. 

There are however separate articles about gifting money to a family member as well as articles on inheritance tax implications when transferring from a parent to a child. From reading these, it would appear there is no limit on the amount of money I can choose to transfer to a parent and there would be no tax liability to me. For my parent, should the interest earned from the funds remain within their personal allowance then they would also have no tax liability to speak of.

Would be useful to get some views on this from others. 

hewhohuntselves

Am I right in thinking that you are going to do all this to save around £415 per month?  Is it worth the hassle/risk?  I personally would not hand over that sum of money to anyone other than my wife.

Albermarle

The risks I would like to exclude here is that 1) they would simply refuse to return the funds

As you will be giving them the money they can then do what they want with it, so the above risk can not be avoided.

castle96

"  I personally would not hand over that sum of money to anyone other than my wife." Trust the wife!!!!! Never.
Never trust anyone!  Yes i HAVE BEEN BITTEN BAD BEFORE

hewhohuntselves

Albermarle said:

The risks I would like to exclude here is that 1) they would simply refuse to return the funds

As you will be giving them the money they can then do what they want with it, so the above risk can not be avoided.

Well, you could put in place a short agreement setting out what they can and cannot do with it.  But if they if they breach it - and the money is lost - what realistically could be done?

InvesterJones

Inheritance etc. probably best asked on the tax board. You're gifting the money, so it's probably covered by existing guidance around gifts. You attaching various conditions doesn't make any difference, it's a gift and they can do what they like with it.

Then there's the usual stuff like premium bonds, ISAs, potentially short maturity bonds depending how easy access you need, which together with the personal savings allowance might reduce it a bit. You could also pay enough into your pension to reduce your income to that of a basic rate and get another £500 allowance.

saverspavers61

Correct it’s for an approximate saving of £450 per month. The way I see it the only hassle is the one off transferring of the funds and eventual return. As for the clear risk while it remains in someone else’s account, I have certainty that the risk is minimal which is why I’m at the juncture of questioning the legality of doing this from a tax avoidance perspective. 

Is there a view from those here on whether I’m doing anything untoward, which I certainly don’t want to do?

When I referenced excluding certain risks I was meaning that they are ones which I’m prepared to accept (knowing my relationship with my family and all that) and focus on 1) the legality of it as a tax avoidance measure and 2) any potential down the road risks with regards to inheritance tax when it’s transferred back.

I’m under no illusion a financial advisor is the best place to start with these things usually but wanted an honest take from others first. 

BoGoF

Maybe there is a distinct lack of info out there because it's not a normal thing to do?

To get full FSCS protection you are going to have to open 3 accounts to put the money in. 

Here's a scenario, what happens if the parent dies and you have £250,000 locked away until probate etc sorted and the ideal house comes up for sale?

Bonkers idea.

Linton

Have you considered the possible "what ifs"? 

What happens if your parent dies whilst holding your money?  For example are you the only beneficary of their estate?  Also, it may take some time before their executor can access the money because their bank will require probate before releasing the money.  This could take a few months.

Then there is the hassle factor
 - I guess they would have to set up 3 or 4 accounts with different banks to ensure the full amount of money is protected by FSCS. 
 - The banks could well be concerned at £250K lump sums going in and out of someone's account and freeze it until they were convinced there was no money laundering going on.Their investigations could take a week or more during which the account was frozen.

As hewhohuntselves said:

Am I right in thinking that you are going to do all this to save around £415 per month?  Is it worth the hassle/risk?  I personally would not hand over that sum of money to anyone other than my wife.

I personally would not take any risk whatsoever playing games with £250K.  60% of the interest on the money .as opposed to 100% is trivial compared with the total pot.

BoGoF

OP would be far better using that capital to mitigate HR tax in the first place. Some of that money could be effectively returning 40% by paying more into pension.

friolento

An awful lot can happen in 7 years. The holder of your money could pass away, the spouse inheriting the money, the spouse re-marrying, passing away, the new spouse now being the heir of everything etc etc. Even if you get a written agreement in place, there will still be pitfalls that might cost you siginificant amounts of money.

In addition, taxation laws are bound to change.