New plan - now the dust has setting following the budget

Madeinireland101

Hi - I am in the fortunate position of being in the position of paying IHT and this is going to be made worse as a result of the recent budget. Rightly or wrongly I was aiming to pass on my pension to the next generation as neither of my daughters have great pension provision and I have a great DB pension which almost covers my existing spend.

I am 63 and wife is 6 years younger.

Assets are…House (£750k), S&S ISA’s (£360k), Cash ISA’s (£106k), SIPP’s (£342k)

I will now take the following actions…

1. Change expression of wish on pensions to children until April 2027 at which point if will change to wife - This is because it will still be outside of estate till then and would pass on tax free to children as I’d be under 75. After 2027 it would be subject to IHT unless it goes to wife. If I go before 75 she will be able to withdraw it tax free and gift it free of tax to the children if she lives 7 years.

2. Withdraw Tax free lump sum and either spend, transfer to ISA’s, or gift to children who can create ISA’s

3. Withdraw difference between my DB pension income and 40% limit each of the next 3/4 years and spend it until state pension age moves me permanently into higher tax bracket.

2 & 3 together should reduce SiPP’s to £232k at which point I will have to leave it to my wife when she inherits to withdraw and gift or spend up to 40% limit as much as possible - unless the rules change in the future again. Hopefully we can target reducing estate to the £1m limit by gifting so children can inherit with no tax to pay and then they can use tax limits to withdraw remainder.

4. Consider delaying state pension to enable further withdrawals from SIPP.

5. Gift as much as possible using 7 year rule or gifting out of income to reduce remainder to IHT limit.

6. Consider downsizing and further gifting if necessary.

Please let me know if you see any holes.

Thanks…

Mr.Generous

My understanding was any money left in the pot at death was taxed at 40% as a death duty regardless of age, then extra tax for the recipient. Not that I aim to die before 75 ... but that would save a few quid.

I'm shifting rental income to wife's name - £30 to change deeds to joint ownership - then draw down a lot more at 20% tax. The aim really should be to clear the pot at 20% - don't haveto spend it, you can invest in ISA's or whatever.

Madeinireland101

Mr.Generous said:

My understanding was any money left in the pot at death was taxed at 40% as a death duty regardless of age, then extra tax for the recipient. Not that I aim to die before 75 ... but that would save a few quid.

I don’t think you are correct…

Firstly - no change till April 2027. It’s all tax free if you die before 75. 

After April 2027 if your spouse inherits and you die before 75 its completely tax free. If you die after 75 then it’s IHT free and taxed at spouse marginal rate.

After April 2027 if someone else inherits then if your estate exceeds IHT limits then it’s 40% tax  and then the inheritors marginal rate so double taxed 

Please let me know if this is not right as it’s the way I read it at the minute.

CorseyEdge

 neither of my daughters have great pension provision and I have a great DB pension which almost covers my existing spend.
...

3. Withdraw difference between my DB pension income and 40% limit each of the next 3/4 years and spend it until state pension age moves me permanently into higher tax bracket.

As they don't have great pension provision, have you considered gifting, from income, a regular (monthly?) amount into a SIPP for each of your daughters? At least some tax-relief will be 'regained', hence offsetting the tax paid from your own withdrawals. Plus, with good records, you can show gifting from surplus income (IHT exempt currently).  That is one idea I was considering. 

Madeinireland101

CorseyEdge said:

 neither of my daughters have great pension provision and I have a great DB pension which almost covers my existing spend.
...

3. Withdraw difference between my DB pension income and 40% limit each of the next 3/4 years and spend it until state pension age moves me permanently into higher tax bracket.

As they don't have great pension provision, have you considered gifting, from income, a regular (monthly?) amount into a SIPP for each of your daughters? At least some tax-relief will be 'regained', hence offsetting the tax paid from your own withdrawals. Plus, with good records, you can show gifting from surplus income (IHT exempt currently).  That is one idea I was considering. 

Yes that’s a good idea which I am considering but in this period of extracting tax free cash I’m a bit worried that I may breach the gifting rules in some way so I think I may wait on that till I start receiving the state pension as that will then definately put me in a good position to gift out of surplus income - I’m not sure how anyone would be able to argue, if I am OK now and don’t need the state pension to get by at the same standard of living, that giving it all (or most of it) to them is not gifting out of surplus income 😀 - plus I’d like them to get benefit now rather than put the money into the pension restriction that they can only use when much older.

SouthCoastBoy

I will be changing my pension beneficiaries in Apr 2027, currently split between wife and kids but will be giving all to wife and encourage her to gift wealth ASAP if I die.

Madeinireland101

[Deleted User] said:

I wonder where it is best to have your cash?  Why not sell equity in the pension to get the cash in their and use the cash ISAs to buy shares.  That way (hopefully higher compared with interest) growth happens in a no tax environment?

Withdrawaing the tax-free cash doesn't need to happen (purely from a tax perspective) until age 75, especially as you are not at the LSA limit.  Why not crystallise over time in a way that allows you to make use of your annual ISA allowances?

Thanks - On your second comment I will be crystallizing over a period. It’s actually two SIPPs  so will be withdrawing tax free cash over two years (circa £80k) and using it to get ISA’s - but also to spend on some house renovations. The rest will be gifted to children. I don’t see the point of waiting till 75 and risking another gov intervention.

on your first point - what I am doing is probably not the best approach to make money - but as I see it I don’t need any more money - so in this uncertain world I’d rather move some more into the safety of cash so as to be in a better position to gift. My S&S ISA’s are already stacked with shares - some of them not doing great which I’m waiting to recover but some of them doing very well (take a bow Rolls Royce!). I think I’ve learned as an investor it’s not easy to continually do well so maybe time to utilize funds more and take a more cautious approach now I’m in a pretty safe position.

Hope this all makes sense.

Sea_Shell

SouthCoastBoy said:

I will be changing my pension beneficiaries in Apr 2027, currently split between wife and kids but will be giving all to wife and encourage her to gift wealth ASAP if I die.

I wonder how many people want to do that, but are part of a blended family where their spouse is not the parent of their children, so can't take the risk of the money being passed on as they wish. 

This workaround, doesn't really work in those circumstances, and they might just have to take the hit.   

Wills can be written...but then re-written.  

RoysV

Madeinireland101 said:

Mr.Generous said:

My understanding was any money left in the pot at death was taxed at 40% as a death duty regardless of age, then extra tax for the recipient. Not that I aim to die before 75 ... but that would save a few quid.

I don’t think you are correct…

Firstly - no change till April 2027. It’s all tax free if you die before 75. 

After April 2027 if your spouse inherits and you die before 75 its completely tax free. If you die after 75 then it’s IHT free and taxed at spouse marginal rate.

After April 2027 if someone else inherits then if your estate exceeds IHT limits then it’s 40% tax  and then the inheritors marginal rate so double taxed 

Please let me know if this is not right as it’s the way I read it at the minute.

I thought you were wrong but after looking at some examples on the Govt website it seems you are correct. Seems harsh on people who aren't married though, I honestly thought the new rules were a "catch all" type of thing 

zagfles

Madeinireland101 said:

Mr.Generous said:

My understanding was any money left in the pot at death was taxed at 40% as a death duty regardless of age, then extra tax for the recipient. Not that I aim to die before 75 ... but that would save a few quid.

I don’t think you are correct…

Firstly - no change till April 2027. It’s all tax free if you die before 75. 

After April 2027 if your spouse inherits and you die before 75 its completely tax free. If you die after 75 then it’s IHT free and taxed at spouse marginal rate.

After April 2027 if someone else inherits then if your estate exceeds IHT limits then it’s 40% tax  and then the inheritors marginal rate so double taxed 

Please let me know if this is not right as it’s the way I read it at the minute.

Only on death over 75. Under 75 there's no income tax. AIUI. 

Linton

Mr.Generous said:

My understanding was any money left in the pot at death was taxed at 40% as a death duty regardless of age, then extra tax for the recipient. Not that I aim to die before 75 ... but that would save a few quid.

I'm shifting rental income to wife's name - £30 to change deeds to joint ownership - then draw down a lot more at 20% tax. The aim really should be to clear the pot at 20% - don't haveto spend it, you can invest in ISA's or whatever.

Surely money left in the pension pot at death is only charged IHT if you are an IHT payer, same as any of your assets.

So how does withdrawing the money to put into an ISA help?  You would still be charged 40% on the money in the ISA.