Helping Mum plan to reduce exposure to Tax on Savings Interest - thoughts invited

PostmanPete21

Hi, this is my first post here.  It is primarily to do with savings and tax on interest, although there are also elements of inheritance and mortgage about it too, so I hope I’ve posted it in the correct place.

Also, sorry for such a long post.  I appreciate it covers a lot of ground and I’m sure it looks a bit “amateur hour” I guess because that’s where my knowledge is at right now.  I’m very happy to be pointed in a better direction though and I really want to learn.

First, A TLDR summary... Is it OK to gift £20k chunks of money to family members who will then use their own ISA allowances to reduce tax exposure for the "gifter"?  Furthermore, is it OK to gift £XXX thousand to family members to use to clear their mortgages and use saved mortgage payments to accrue £XXX thousand plus compound interest which will morally belong to the "gifter" even if not in name?

My Mum and Dad are quite well off.  They have a house worth around £650k (no mortgage) and a savings pot of around £350k which is spread over half a dozen 1-year fixed rate bonds.  Their £120k p/a pension was in Dad’s name and the savings were in Mum’s name and with the previously low interest rates, tax on savings interest was not really considered too much.

However, my Dad passed away last year and I’m now trying to help Mum minimise her exposure to tax on savings interest.  I have no experience of these things, not having had enough money to save myself, but I’d like to think I’m a quick learner.

My understanding is that her personal savings interest allowance is just £500 because she has a widows pension of just over £60k p/a.  We’re projecting interest on savings over the next 12 months of around £16.6k so it looks like HMRC will be looking to take pretty much 40% of that amount and that we’ll have to do a self assessment into the mix.  It is too late to do anything about next year as the bonds are all in place and will pay out into her name over the course of the year, however we’re now trying to come up with a strategy for future years.

None of the savings are in any form of ISA so this seems to be the first thing to look at fixing.  Myself, my wife and my sister all have our complete £20k ISA allowance available so we ought to be using that.  Mum is 75 and I understand that it would be a good idea for her to start gifting some of the savings to us which has a two pronged benefit

1. We can pay it into an isa in our own names to avoid tax and…

2. It reduces the amount which will be subject to IHT when Mum dies

Although the money will be in our names, we are all of the understanding that it is still “Mum's Money” and should it be needed for care etc later in life, then such things would be funded from that money.  We are a strong family unit and trust is not an issue.

We have an £80k bond maturing today so I’m planning that we immediately transfer £20k each to myself, my sister and my wife, and along with £20k in mum’s name, we each pay it into an ISA before April 5th.

We can do the same again in May when the next £80k bond matures.  This will have taken £160k out of the reach of HMRC.

As I understand it, the only thing which might cause problems with this would be if mum dies within 7 years of any of the gifts, in which instance it would (sort of) go back into her name and become subject to possible IHT (loosely speaking).

I think I’m correct in saying that because Dad left the house and savings to Mum, then Mum can add his allowance to her own therefore she can bequeath £1m before any tax is due and her assets are more-or-less at that level anyway.

I had further thoughts on another way of avoiding tax at the expense of the liquidity of mum’s savings.  This is where it gets into territory that I’m quite unsure about.

My mortgage has £60k remaining with 10 years to go.  If mum were to gift me £60k and I were to use it to clear the mortgage, I could then take a 10 year view and use the money saved on mortgage payments to pay into another ISA (notwithstanding I’ve used my allowance for this year and next year) such that the £60k grows to the same amount as it would had it been earning compound interest with Mum.  In essence I’m paying interest to Mum interest instead of the mortgage company.  I realise that if I were to pay the interest directly to Mum then she’d have to pay tax on it, therefore it would all remain in my name (albeit still being “Mum’s Money”).

The down side to this is that £60k of “Mum’s Money” becomes tied up for 10 years and she can’t use it if she needed to.  Mum doesn’t have any plans to spend significant money.  Her pension is sufficient for her general needs plus holidays etc and the ISA’s would only ever be 1 year away from being liquid.

The thing that those savings are likely to be needed for is to pay for care in Mum's old age.  However, I don’t think this is likely to be an issue because of my sister’s situation.  We always had an agreement that if at all possible Mum will not be put into a care home and that, when the time comes, my sister will move in with mum and care for her needs.  My sister has 4 years left of an interest-only mortgage of £130k and hasn’t ever had an endowment etc so will basically have to sell her house when the mortgage becomes due. 

It therefore also seems like a good idea then, that mum could loan my sister £130k with which she can clear her mortgage and use the money saved to pay into another ISA to accrue the interest that would have been earned had the money stayed with Mum.  Then, when Mum’s needs become such that my sister moves in to help care for her, she sells her house and the £130k proceeds go back to mum with the interest remaining in my sister’s name whilst still being “Mum’s Money”.

Thus in a notional 10 years time, Mum has earned full interest on all her money without paying much if any tax, with the side benefit that my sister and I have saved a bit on our mortgages by virtue of paying 5% interest to "Mum's Money" instead of 6.5/7% to Lloyds or whoever.

I’m sure I have missed something super important that means the above is a complete non-starter.  Maybe it's illegal, I don't know?  Any thoughts?

Many Thanks

wmb194

PostmanPete21 said:

Hi, this is my first post here.  It is primarily to do with savings and tax on interest, although there are also elements of inheritance and mortgage about it too, so I hope I’ve posted it in the correct place.

Also, sorry for such a long post.  I appreciate it covers a lot of ground and I’m sure it looks a bit “amateur hour” I guess because that’s where my knowledge is at right now.  I’m very happy to be pointed in a better direction though and I really want to learn.

First, A TLDR summary... Is it OK to gift £20k chunks of money to family members who will then use their own ISA allowances to reduce tax exposure for the "gifter"?  Furthermore, is it OK to gift £XXX thousand to family members to use to clear their mortgages and use saved mortgage payments to accrue £XXX thousand plus compound interest which will morally belong to the "gifter" even if not in name?

My Mum and Dad are quite well off.  They have a house worth around £650k (no mortgage) and a savings pot of around £350k which is spread over half a dozen 1-year fixed rate bonds.  Their £120k p/a pension was in Dad’s name and the savings were in Mum’s name and with the previously low interest rates, tax on savings interest was not really considered too much.

However, my Dad passed away last year and I’m now trying to help Mum minimise her exposure to tax on savings interest.  I have no experience of these things, not having had enough money to save myself, but I’d like to think I’m a quick learner.

My understanding is that her personal savings interest allowance is just £500 because she has a widows pension of just over £60k p/a.  We’re projecting interest on savings over the next 12 months of around £16.6k so it looks like HMRC will be looking to take pretty much 40% of that amount and that we’ll have to do a self assessment into the mix.  It is too late to do anything about next year as the bonds are all in place and will pay out into her name over the course of the year, however we’re now trying to come up with a strategy for future years.

None of the savings are in any form of ISA so this seems to be the first thing to look at fixing.  Myself, my wife and my sister all have our complete £20k ISA allowance available so we ought to be using that.  Mum is 75 and I understand that it would be a good idea for her to start gifting some of the savings to us which has a two pronged benefit

1. We can pay it into an isa in our own names to avoid tax and…

2. It reduces the amount which will be subject to IHT when Mum dies

Although the money will be in our names, we are all of the understanding that it is still “Mum's Money” and should it be needed for care etc later in life, then such things would be funded from that money.  We are a strong family unit and trust is not an issue.

We have an £80k bond maturing today so I’m planning that we immediately transfer £20k each to myself, my sister and my wife, and along with £20k in mum’s name, we each pay it into an ISA before April 5th.

We can do the same again in May when the next £80k bond matures.  This will have taken £160k out of the reach of HMRC.

As I understand it, the only thing which might cause problems with this would be if mum dies within 7 years of any of the gifts, in which instance it would (sort of) go back into her name and become subject to possible IHT (loosely speaking).

I think I’m correct in saying that because Dad left the house and savings to Mum, then Mum can add his allowance to her own therefore she can bequeath £1m before any tax is due and her assets are more-or-less at that level anyway.

I had further thoughts on another way of avoiding tax at the expense of the liquidity of mum’s savings.  This is where it gets into territory that I’m quite unsure about.

My mortgage has £60k remaining with 10 years to go.  If mum were to gift me £60k and I were to use it to clear the mortgage, I could then take a 10 year view and use the money saved on mortgage payments to pay into another ISA (notwithstanding I’ve used my allowance for this year and next year) such that the £60k grows to the same amount as it would had it been earning compound interest with Mum.  In essence I’m paying interest to Mum interest instead of the mortgage company.  I realise that if I were to pay the interest directly to Mum then she’d have to pay tax on it, therefore it would all remain in my name (albeit still being “Mum’s Money”).

The down side to this is that £60k of “Mum’s Money” becomes tied up for 10 years and she can’t use it if she needed to.  Mum doesn’t have any plans to spend significant money.  Her pension is sufficient for her general needs plus holidays etc and the ISA’s would only ever be 1 year away from being liquid.

The thing that those savings are likely to be needed for is to pay for care in Mum's old age.  However, I don’t think this is likely to be an issue because of my sister’s situation.  We always had an agreement that if at all possible Mum will not be put into a care home and that, when the time comes, my sister will move in with mum and care for her needs.  My sister has 4 years left of an interest-only mortgage of £130k and hasn’t ever had an endowment etc so will basically have to sell her house when the mortgage becomes due. 

It therefore also seems like a good idea then, that mum could loan my sister £130k with which she can clear her mortgage and use the money saved to pay into another ISA to accrue the interest that would have been earned had the money stayed with Mum.  Then, when Mum’s needs become such that my sister moves in to help care for her, she sells her house and the £130k proceeds go back to mum with the interest remaining in my sister’s name whilst still being “Mum’s Money”.

Thus in a notional 10 years time, Mum has earned full interest on all her money without paying much if any tax, with the side benefit that my sister and I have saved a bit on our mortgages by virtue of paying 5% interest to "Mum's Money" instead of 6.5/7% to Lloyds or whoever.

I’m sure I have missed something super important that means the above is a complete non-starter.  Maybe it's illegal, I don't know?  Any thoughts?

Many Thanks

Unless they're actual gifts with no expectation of repayment muddling up your Mum's money with your own and other people's is a terrible idea.

There are a couple of things you can do other than Isas e.g., max out Premium Bonds and buy low coupon gilts to hold to maturity as their capital gains are effectively interest-like and tax free.

MacPingu1986

On the ISA point... No you cannot avoid tax by opening ISA accounts in other people names for money belonging to your mother - this is tax evasion. The ISA declaration on opening also expressly includes a statement that the contributions belong to [Named Account holder].

Albermarle

PostmanPete21 said:

Hi, this is my first post here.  It is primarily to do with savings and tax on interest, although there are also elements of inheritance and mortgage about it too, so I hope I’ve posted it in the correct place.

Also, sorry for such a long post.  I appreciate it covers a lot of ground and I’m sure it looks a bit “amateur hour” I guess because that’s where my knowledge is at right now.  I’m very happy to be pointed in a better direction though and I really want to learn.

First, A TLDR summary... Is it OK to gift £20k chunks of money to family members who will then use their own ISA allowances to reduce tax exposure for the "gifter"?  Furthermore, is it OK to gift £XXX thousand to family members to use to clear their mortgages and use saved mortgage payments to accrue £XXX thousand plus compound interest which will morally belong to the "gifter" even if not in name?
You can give as much money as you like to who you like. The issue is that then that money legally belongs to the person who receives it, and they are under no legal obligation to give it back.
The person receiving the gift can do what they want with it. Put it in an ISA, pay off a mortgage, go on a round the world cruise etc

My Mum and Dad are quite well off.  They have a house worth around £650k (no mortgage) and a savings pot of around £350k which is spread over half a dozen 1-year fixed rate bonds.  Their £120k p/a pension ( now that's what you call a good pension !) was in Dad’s name and the savings were in Mum’s name and with the previously low interest rates, tax on savings interest was not really considered too much.

However, my Dad passed away last year and I’m now trying to help Mum minimise her exposure to tax on savings interest.  I have no experience of these things, not having had enough money to save myself, but I’d like to think I’m a quick learner.

My understanding is that her personal savings interest allowance is just £500 because she has a widows pension of just over £60k p/a.  We’re projecting interest on savings over the next 12 months of around £16.6k so it looks like HMRC will be looking to take pretty much 40% of that amount and that we’ll have to do a self assessment into the mix.  It is too late to do anything about next year as the bonds are all in place and will pay out into her name over the course of the year, however we’re now trying to come up with a strategy for future years.

None of the savings are in any form of ISA so this seems to be the first thing to look at fixing.  Myself, my wife and my sister all have our complete £20k ISA allowance available so we ought to be using that.  Mum is 75 and I understand that it would be a good idea for her to start gifting some of the savings to us which has a two pronged benefit

1. We can pay it into an isa in our own names to avoid tax and…

2. It reduces the amount which will be subject to IHT when Mum dies

Although the money will be in our names, we are all of the understanding that it is still “Mum's Money” and should it be needed for care etc later in life, then such things would be funded from that money.  We are a strong family unit and trust is not an issue. Maybe not now, but new partners can come into peoples lives, divorces etc 

We have an £80k bond maturing today so I’m planning that we immediately transfer £20k each to myself, my sister and my wife, and along with £20k in mum’s name, we each pay it into an ISA before April 5th.

We can do the same again in May when the next £80k bond matures.  This will have taken £160k out of the reach of HMRC. That is OK taking into account my previous comments, but of course it blocks you and the others from utilising their ISA allowances elsewhere.

As I understand it, the only thing which might cause problems with this would be if mum dies within 7 years of any of the gifts, in which instance it would (sort of) go back into her name and become subject to possible IHT (loosely speaking). Yes they would if the estate was big enough to have an IHT liability,

I think I’m correct in saying that because Dad left the house and savings to Mum, then Mum can add his allowance to her own therefore she can bequeath £1m before any tax is due and her assets are more-or-less at that level anyway. As long as the house is left to her children.

I had further thoughts on another way of avoiding tax at the expense of the liquidity of mum’s savings.  This is where it gets into territory that I’m quite unsure about.

My mortgage has £60k remaining with 10 years to go.  If mum were to gift me £60k and I were to use it to clear the mortgage, I could then take a 10 year view and use the money saved on mortgage payments to pay into another ISA (notwithstanding I’ve used my allowance for this year and next year) such that the £60k grows to the same amount as it would had it been earning compound interest with Mum.  In essence I’m paying interest to Mum interest instead of the mortgage company.  I realise that if I were to pay the interest directly to Mum then she’d have to pay tax on it, therefore it would all remain in my name (albeit still being “Mum’s Money”).

The down side to this is that £60k of “Mum’s Money” becomes tied up for 10 years and she can’t use it if she needed to.  Mum doesn’t have any plans to spend significant money.  Her pension is sufficient for her general needs plus holidays etc and the ISA’s would only ever be 1 year away from being liquid.

The thing that those savings are likely to be needed for is to pay for care in Mum's old age.  However, I don’t think this is likely to be an issue because of my sister’s situation.  We always had an agreement that if at all possible Mum will not be put into a care home and that, when the time comes, my sister will move in with mum and care for her needs. Depending on your Mum's needs that just might not be practically feasible.  My sister has 4 years left of an interest-only mortgage of £130k and hasn’t ever had an endowment etc so will basically have to sell her house when the mortgage becomes due. 

It therefore also seems like a good idea then, that mum could loan my sister £130k with which she can clear her mortgage and use the money saved to pay into another ISA to accrue the interest that would have been earned had the money stayed with Mum.  Then, when Mum’s needs become such that my sister moves in to help care for her, she sells her house  When/if the time comes this might not seem as an attractive option as it does in theory.and the £130k proceeds go back to mum with the interest remaining in my sister’s name whilst still being “Mum’s Money”.

Thus in a notional 10 years time, Mum has earned full interest on all her money without paying much if any tax, with the side benefit that my sister and I have saved a bit on our mortgages by virtue of paying 5% interest to "Mum's Money" instead of 6.5/7% to Lloyds or whoever.

I’m sure I have missed something super important that means the above is a complete non-starter.  Maybe it's illegal, I don't know?  Any thoughts?

Many Thanks

It is a rather long post covering a lot of issues, so I have just added in some random comments rather than addressing everything.
One simple thing would be for her to put £50K into Premium bonds, they are good for 40% taxpayers as the prizes are tax free.

There is a saying often used in these forums. Don't let the tax tail wag the investment dog.
It means do not let the desire to avoid tax dominate your financial planning to the point of making poor decisions.

Albermarle

MacPingu1986 said:

On the ISA point... No you cannot avoid tax by opening ISA accounts in other people names for money belonging to your mother - this is tax evasion. The ISA declaration on opening also expressly includes a statement that the contributions belong to [Named Account holder].

If somebody gives someone a gift of £20K, and that person chooses to put that money ( which is now theirs), in their own ISA, that is perfectly legal.

MacPingu1986

Albermarle said:

MacPingu1986 said:

On the ISA point... No you cannot avoid tax by opening ISA accounts in other people names for money belonging to your mother - this is tax evasion. The ISA declaration on opening also expressly includes a statement that the contributions belong to [Named Account holder].

If somebody gives someone a gift of £20K, and that person chooses to put that money ( which is now theirs), in their own ISA, that is perfectly legal.

Correct, but the OP isn’t talking about their mother unconditionally gifting them £20k.

The scenario presented is that their mother gives the OP £20k to invest in an ISA on the understanding the money and investment proceeds still beneficially belong to the mother (and not declared on the mothers tax return). That’s a breach of the ISA rules & limits and tax evasion - its a non-starter.

jimexbox

MacPingu1986 said:

Albermarle said:

MacPingu1986 said:

On the ISA point... No you cannot avoid tax by opening ISA accounts in other people names for money belonging to your mother - this is tax evasion. The ISA declaration on opening also expressly includes a statement that the contributions belong to [Named Account holder].

If somebody gives someone a gift of £20K, and that person chooses to put that money ( which is now theirs), in their own ISA, that is perfectly legal.

Correct, but the OP isn’t talking about their mother unconditionally gifting them £20k.

The scenario presented is that their mother gives the OP £20k to invest in an ISA on the understanding the money and investment proceeds still beneficially belong to the mother (and not declared on the mothers tax return). That’s a breach of the ISA rules & limits and tax evasion - its a non-starter.

So what's the ethical/legal difference of me using my partners starting saving rate to minimise tax on my interest?

Legally the money/interest is my partners. As I completely trust them the money is ours, to be spent together. I benefit for their allowance. 

LHW99

jimexbox said:

MacPingu1986 said:

Albermarle said:

MacPingu1986 said:

On the ISA point... No you cannot avoid tax by opening ISA accounts in other people names for money belonging to your mother - this is tax evasion. The ISA declaration on opening also expressly includes a statement that the contributions belong to [Named Account holder].

If somebody gives someone a gift of £20K, and that person chooses to put that money ( which is now theirs), in their own ISA, that is perfectly legal.

Correct, but the OP isn’t talking about their mother unconditionally gifting them £20k.

The scenario presented is that their mother gives the OP £20k to invest in an ISA on the understanding the money and investment proceeds still beneficially belong to the mother (and not declared on the mothers tax return). That’s a breach of the ISA rules & limits and tax evasion - its a non-starter.

So what's the ethical/legal difference of me using my partners starting saving rate to minimise tax on my interest?

Legally the money/interest is my partners. As I completely trust them the money is ours, to be spent together. I benefit for their allowance. 

If you are married / civil partners, there is no tax on the gift at the time, and no IHT later. Nevertheless, it  does become the partner's money, so if he / she decides to do a runner with it, despite your trust, then you have no way to retrieve it.

Hoenir

Perhaps your mother could use some independent tax planning advice. Her needs and wishes should come first. Saving some tax now on interest is secondary in the bigger scheme of things. As her estate is likely to be substantial with a sizable IHT bill. 

Seasalt3

It all sounds like a bad idea to me just to save having to pay tax on savings interest.  Would think best to keep everything straight forward and in your mum's name but to utilise her isa allowance and buy premium bonds.  If she has to pay tax on the interest from her savings its not the end of the world and is better to do that than risk what you are proposing

Linton

What happens if you die before Mum? If the money is in your name it presumably is subject to the conditions of your will. SImilarly if you go bankrupt or divorce.  Doing what you are suggesting risks Mum losing her money. Perhaps it would be unlikely but it is possible.

If you regularly read the Deaths, Funerals and Probate board you would soon come to the conclusion that families and money dont mix well which can lead to bad feeling and the destruction of relationships.   It would be better if Mum paid for informed and independent advice focussed on what is in her best interests.