Unerstanding and managing inheritance tax

Early_Retire_Free

Having retired and now being in our 60's with two adult children, thoughts are turning to IHT (probably a bit late but there you go).  My understanding on the best ways to plan for the tax are:

1. Don't die.
2. Spend it all.
3. Move somewhere that does not charge IHT.
4. Give it away 7 years before you die.
5. Put the money in trust.
6. Take out a life insurance policy to provide funds to pay the tax.
7. Use various allowances.

1&2 are unlikely.  Anything else to think about?

tacpot12

You need to be careful about putting money in trust while you might still needed it. Take advice and do lots of research before going down the Trust route. 

One useful allowance is the ability to give away money out of income that is suplus to your requirements. If you can cover all your day-to-day expenses and also save for longer-term costs such as replacing appliances when they fail, items of furniture and mattresses when they wears out, replacing your car, replacing the roof on your house, then anything over an above this is suplus to requirements and can be given away freely. Such gifts don't attract Inheritance Tax at all. 

To my mind, you cannot justify giving away money as being surplus income AND give away £3000 a year (the annual exemption for gifts under IHT), as the £3000 is effectively NOT surplus to requirements and if you have any money that NOT surplus, you can't say you have income that IS surplus. I don't know what HMRC think about this. Hopefull others might be able to confirm from experience or a trusted source.

I'm not sure 1. is a good solution as it suddenly creates the need for you have income for an indefinite period! If you crack this one, do let me know. 

Keep_pedalling

Do you have in excess of £1M of assets? If not you don’t you currently have no IHT liability. If you do then consider gifting to adult children rather than setting up trusts that complicate your estate and potentially create other tax problems. 

Insurance can be a useful and cheap solution do cover IHT on gifts if your unfortunate meat an early early demise.

Do you currently have wills and LPAs in place? If not those should be a top priority. 

Early_Retire_Free

Keep_pedalling said:

Do you have in excess of £1M of assets? 

Yes, significantly.

No will in place so yes that is top of the list.

Albermarle

Money that is left unused in a Defined Contribution pension pot when you die, is not included in your estate for IHT purposes.
So if either of you have a decent DC pension pot you could consider not withdrawing from it, and use other sources of income instead, if possible.
Worth noting that the exemption of pension pots from IHT is basically a loophole, and it is speculated that the new Chancellor may make moves to restrict this in future.
As you are retired ( and presumably not earning an income) there is only limited scope for adding money to a DC pot, but it could be something to think about.

HappyHarry

Early_Retire_Free said:

Having retired and now being in our 60's with two adult children, thoughts are turning to IHT (probably a bit late but there you go).  My understanding on the best ways to plan for the tax are:

1. Don't die.
2. Spend it all.
3. Move somewhere that does not charge IHT.
4. Give it away 7 years before you die.
5. Put the money in trust.
6. Take out a life insurance policy to provide funds to pay the tax.
7. Use various allowances.

1&2 are unlikely.  Anything else to think about?

1. Unlikely
2. This can be enjoyable 
3. Tricky - domicile is the key word here and does not change quickly
4. Can do - but be careful that  you do not "go without" during your lifetimes
5. Same as 4 - you can give it to somebody or a trust, the seven year rule still applies.
6. Expensive and the premiums could count towards your estate.
7. Sensible - make sure you know what they are
8. Invest in some assets that attract Business Property Relief and will remain accessible but get 100% relief from IHT after you have held them for two years. (All sorts of risks attached to these).
9. Make sure you are clear on the IHT rules - Nil rate bands, residence nil rate bands, charitable gifts and so on.

We do not know which of the above options may or may not be best for you. Being in your 60's is certainly not too late to think about it, unless you have some life-limiting illness, so you should have plenty of time to consider options.

If you haven't got a will, you probably don't have Powers of Attorney in place either, so make sure you get these drawn up as well.

Albermarle

If you haven't got a will, you probably don't have Powers of Attorney in place either, so make sure you get these drawn up as well.

As a general point best to avoid DIY wills, but you can do the PoAs online your self, and no need for a solicitor. 

Keep_pedalling

Not having a will could lead to IHT on the first death as only the first £322k automatically passes to your spouse and the rest will be split 59% to the spouse and 50% to the children 

Grumpy_chap

Early_Retire_Free said:

Having retired and now being in our 60's with two adult children, thoughts are turning to IHT (probably a bit late but there you go).  My understanding on the best ways to plan for the tax are:

1. Don't die.
2. Spend it all.
3. Move somewhere that does not charge IHT.
4. Give it away 7 years before you die.
5. Put the money in trust.
6. Take out a life insurance policy to provide funds to pay the tax.
7. Use various allowances.

1&2 are unlikely.  Anything else to think about?

Your final sentence is pessimistic.
OK - I guess eventually 1 will not be possible.
On the other hand, (2) is entirely possible and, if you are not on track now, just enhance your life style until you are on track to get this achieved.

Albermarle

One point not mentioned so far is that gifts to charity, before you die and in your will, are exempt from any IHT.
If your will leaves 10% of your estate above IHT allowances to charity, the tax rate on the rest drops from 40% to 36%.
A significant donation to charity can be made without it actually costing you anywhere near as much as the donation the charity actually receives.

Early_Retire_Free

Albermarle said:

Money that is left unused in a Defined Contribution pension pot when you die, is not included in your estate for IHT purposes.
So if either of you have a decent DC pension pot you could consider not withdrawing from it, and use other sources of income instead, if possible.
Worth noting that the exemption of pension pots from IHT is basically a loophole, and it is speculated that the new Chancellor may make moves to restrict this in future.
As you are retired ( and presumably not earning an income) there is only limited scope for adding money to a DC pot, but it could be something to think about.

Agreed - thanks for that - I suspect this may be a target for the chancellor.  We have around £750k in DC pots between us and at this stage that would be the last bucket to be touched.