ISA vs SIPP - impact of IHT change

SnowMan

[Deleted User] said:

Triumph13 said:

Alternate plan.  Make sure you have enough in ISAs to cover your final illness.  When you get a terminal diagnosis, withdraw all the excess over the nil rate band from your SIPP in one go and gift it - it's clearly a gift from income unless they specifically legislate to stop this. 

It's not 'clearly' income for IHT purposes. It might be.  It might not be. It will ultimately depend on the facts. The fact it is taxed as income for pension tax purposes doesn't means it's income for IHT purposes.

No expert on it, but I would go further and say it is almost certain it wouldn't be classed as a gift out of income. The HMRC manual isn't a statement of law but I suspect their interpretation isn't going to be far wrong

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14241

Triumph13

[Deleted User] said:

Triumph13 said:

Alternate plan.  Make sure you have enough in ISAs to cover your final illness.  When you get a terminal diagnosis, withdraw all the excess over the nil rate band from your SIPP in one go and gift it - it's clearly a gift from income unless they specifically legislate to stop this. 

It's not 'clearly' income for IHT purposes. It might be.  It might not be. It will ultimately depend on the facts. The fact it is taxed as income for pension tax purposes doesn't means it's income for IHT purposes.

Bother.  You're right, "income" is undefined for IHT so we'll probably need to wait for a court case.

fuzzzzy

Triumph13 said:

Alternate plan.  Make sure you have enough in ISAs to cover your final illness.  When you get a terminal diagnosis, withdraw all the excess over the nil rate band from your SIPP in one go and gift it - it's clearly a gift from income unless they specifically legislate to stop this.  You pay 45% tax rather than 52% or 64%, which should be enough of a difference to be worth the hassle of your heirs receiving it unwrapped.

That way you keep hold of the investments until you know you're not long for the world and avoid the longevity risk of gifting early.

You may not get a terminal diagnosis, you might just croak it unexpectedly.

Triumph13

fuzzzzy said:

Triumph13 said:

Alternate plan.  Make sure you have enough in ISAs to cover your final illness.  When you get a terminal diagnosis, withdraw all the excess over the nil rate band from your SIPP in one go and gift it - it's clearly a gift from income unless they specifically legislate to stop this.  You pay 45% tax rather than 52% or 64%, which should be enough of a difference to be worth the hassle of your heirs receiving it unwrapped.

That way you keep hold of the investments until you know you're not long for the world and avoid the longevity risk of gifting early.

You may not get a terminal diagnosis, you might just croak it unexpectedly.

Indeed.  Just add that in to all the other uncertainties  - of which the biggest is probably the likelihood that they will change the rules entirely again.  

Grumpy_chap

MK62 said:

I think we need to wait and see the detail first........bringing pensions into IHT could mean different things, depending on how it's done........for example, will there be a "pension nil rate band" as long as the pension is passed to direct descendants (rather like the residence nil rate band)?

It seems wholly unjust to create yet another punishment for those that were unable to have children.

solidpro

I was about to suggest avoiding IHT by buying a farm, but maybe that's not the best idea either...

Farms should be used as farms, not tax avoidance. SIPPs should be used to support your own old age, not tax avoidance. 

Madeinireland101

First of all apologies to those who have financial difficulties as a result of the budget changes. I’m not in that category and I am fortunate enough not to have to worry at all but I thought for the debate I could share my position so that other could comment if they think I’d doing anything too daft…

I have an inheritance tax issue. Estate for me and the wife is probably in the region of £1.6m with SIPPs making up about £360k of that. Up till this budget I had not intended touching those SIPP’s and just let them eventually pass to wife first (assuming I die first as I’m older) and then children. The budget has of could made the inheritance issue worst to the tune of £360k. I also have a DB pension that pretty much covers our needs and at the age of 63 will soon get full state pension too.

My plan now is to eliminate that SIPP position as much as possible and avoiding 40% as much as possible. This means I will first remove the tax free lump sums £90k and put £40k in ISA for wife and myself. The remaining £50k will either be gifted to two children and spent on having a good time - up to now I’ve been generally a frugal person but not anymore. I will also withdraw about £10k each if next 3 years before I get the state pension. This will leave about £240k in a SIPP. If I die this will pass to my wife who can then use her tax allowances to continue to withdraw or she can pass to the kids who will hopefully in the future have opportunities to utilise the tax system to withdraw at favourable tax rates. The objective would be to try to get into a position where the remaining SIPP sits within a remaining £1m estate. What that means is that we will now be embarking on a gift spree with our children to get our estate down to £1m from what remains in ISA’s and property.

i realise this is limited information on my circumstances but happy to hear if anyone things I’m making any major blunders that I haven’t thought about - God knows  I’ve made enough in putting too much in SIPPs and having a frugal lifestyle in the past 😀

poseidon1

Madeinireland101 said:

First of all apologies to those who have financial difficulties as a result of the budget changes. I’m not in that category and I am fortunate enough not to have to worry at all but I thought for the debate I could share my position so that other could comment if they think I’d doing anything too daft…

I have an inheritance tax issue. Estate for me and the wife is probably in the region of £1.6m with SIPPs making up about £360k of that. Up till this budget I had not intended touching those SIPP’s and just let them eventually pass to wife first (assuming I die first as I’m older) and then children. The budget has of could made the inheritance issue worst to the tune of £360k. I also have a DB pension that pretty much covers our needs and at the age of 63 will soon get full state pension too.

My plan now is to eliminate that SIPP position as much as possible and avoiding 40% as much as possible. This means I will first remove the tax free lump sums £90k and put £40k in ISA for wife and myself. The remaining £50k will either be gifted to two children and spent on having a good time - up to now I’ve been generally a frugal person but not anymore. I will also withdraw about £10k each if next 3 years before I get the state pension. This will leave about £240k in a SIPP. If I die this will pass to my wife who can then use her tax allowances to continue to withdraw or she can pass to the kids who will hopefully in the future have opportunities to utilise the tax system to withdraw at favourable tax rates. The objective would be to try to get into a position where the remaining SIPP sits within a remaining £1m estate. What that means is that we will now be embarking on a gift spree with our children to get our estate down to £1m from what remains in ISA’s and property.

i realise this is limited information on my circumstances but happy to hear if anyone things I’m making any major blunders that I haven’t thought about - God knows  I’ve made enough in putting too much in SIPPs and having a frugal lifestyle in the past 😀

Interesting, your thoughts are in line with a behavioural change I identified as potentially occurring as a result of the budget - see link below.

https://forums.moneysavingexpert.com/discussion/comment/81076596#Comment_81076596

The fact that you are considering redirecting some SIPP TFC to children, is in line with the underlying ethos of IHT ie to encourage  monies to be passed down earlier to the next generation on the assumption they are more likely to spend it in the economy, rather than stockpile it.

Be interesting to see to what degree your sentiments are echoed by many others over the coming months.

Madeinireland101

poseidon1 said:

Madeinireland101 said:

First of all apologies to those who have financial difficulties as a result of the budget changes. I’m not in that category and I am fortunate enough not to have to worry at all but I thought for the debate I could share my position so that other could comment if they think I’d doing anything too daft…

I have an inheritance tax issue. Estate for me and the wife is probably in the region of £1.6m with SIPPs making up about £360k of that. Up till this budget I had not intended touching those SIPP’s and just let them eventually pass to wife first (assuming I die first as I’m older) and then children. The budget has of could made the inheritance issue worst to the tune of £360k. I also have a DB pension that pretty much covers our needs and at the age of 63 will soon get full state pension too.

My plan now is to eliminate that SIPP position as much as possible and avoiding 40% as much as possible. This means I will first remove the tax free lump sums £90k and put £40k in ISA for wife and myself. The remaining £50k will either be gifted to two children and spent on having a good time - up to now I’ve been generally a frugal person but not anymore. I will also withdraw about £10k each if next 3 years before I get the state pension. This will leave about £240k in a SIPP. If I die this will pass to my wife who can then use her tax allowances to continue to withdraw or she can pass to the kids who will hopefully in the future have opportunities to utilise the tax system to withdraw at favourable tax rates. The objective would be to try to get into a position where the remaining SIPP sits within a remaining £1m estate. What that means is that we will now be embarking on a gift spree with our children to get our estate down to £1m from what remains in ISA’s and property.

i realise this is limited information on my circumstances but happy to hear if anyone things I’m making any major blunders that I haven’t thought about - God knows  I’ve made enough in putting too much in SIPPs and having a frugal lifestyle in the past 😀

Interesting, your thoughts are in line with a behavioural change I identified as potentially occurring as a result of the budget - see link below.

https://forums.moneysavingexpert.com/discussion/comment/81076596#Comment_81076596

The fact that you are considering redirecting some SIPP TFC to children, is in line with the underlying ethos of IHT ie to encourage  monies to be passed down earlier to the next generation on the assumption they are more likely to spend it in the economy, rather than stockpile it.

Be interesting to see to what degree your sentiments are echoed by many others over the coming months.

Yes I agree  - a pension is more restrictive as far as I can see now. Of course the Gov could take subsequent action on ISA’s but I think that’s less likely as I think their target here was wealth inheritance. It was easier for them to attack pensions as people can’t do much on that until they reach pension age. 

Sarahspangles

Madeinireland101 said:

poseidon1 said:

Madeinireland101 said:

First of all apologies to those who have financial difficulties as a result of the budget changes. I’m not in that category and I am fortunate enough not to have to worry at all but I thought for the debate I could share my position so that other could comment if they think I’d doing anything too daft…

I have an inheritance tax issue. Estate for me and the wife is probably in the region of £1.6m with SIPPs making up about £360k of that. Up till this budget I had not intended touching those SIPP’s and just let them eventually pass to wife first (assuming I die first as I’m older) and then children. The budget has of could made the inheritance issue worst to the tune of £360k. I also have a DB pension that pretty much covers our needs and at the age of 63 will soon get full state pension too.

My plan now is to eliminate that SIPP position as much as possible and avoiding 40% as much as possible. This means I will first remove the tax free lump sums £90k and put £40k in ISA for wife and myself. The remaining £50k will either be gifted to two children and spent on having a good time - up to now I’ve been generally a frugal person but not anymore. I will also withdraw about £10k each if next 3 years before I get the state pension. This will leave about £240k in a SIPP. If I die this will pass to my wife who can then use her tax allowances to continue to withdraw or she can pass to the kids who will hopefully in the future have opportunities to utilise the tax system to withdraw at favourable tax rates. The objective would be to try to get into a position where the remaining SIPP sits within a remaining £1m estate. What that means is that we will now be embarking on a gift spree with our children to get our estate down to £1m from what remains in ISA’s and property.

i realise this is limited information on my circumstances but happy to hear if anyone things I’m making any major blunders that I haven’t thought about - God knows  I’ve made enough in putting too much in SIPPs and having a frugal lifestyle in the past 😀

Interesting, your thoughts are in line with a behavioural change I identified as potentially occurring as a result of the budget - see link below.

https://forums.moneysavingexpert.com/discussion/comment/81076596#Comment_81076596

The fact that you are considering redirecting some SIPP TFC to children, is in line with the underlying ethos of IHT ie to encourage  monies to be passed down earlier to the next generation on the assumption they are more likely to spend it in the economy, rather than stockpile it.

Be interesting to see to what degree your sentiments are echoed by many others over the coming months.

Yes I agree  - a pension is more restrictive as far as I can see now. Of course the Gov could take subsequent action on ISA’s but I think that’s less likely as I think their target here was wealth inheritance. It was easier for them to attack pensions as people can’t do much on that until they reach pension age. 

The target was explicitly wealth inheritance (from the Budget press release):

From April 2027 inherited pension pots will be subject to inheritance tax. This removes a distortion which has led to pensions being used as a tax planning vehicle to transfer wealth rather than their original purpose to fund retirement.

The more knowledgeable posters on this board have kept pointing out that the financial plans based on inheritance of pension pots may not be a viable strategy.