Would someone please sanity check this plan for avoiding IHT and income tax in retirement (EIS+UFPLS

Workerdrone

With the proposed IHT changes in 2027, Ive been doing a bit of thinking.

At retirement say I have an estate of £1m and a house worth £266k

I am married, I die and I leave it all to my wife, so far so good all tax free.

She dies and leaves the estate to the children.

Their IHT liability is then 40% of the £266k or £106.4k

So I can pretty much guarantee some IHT will be due.

I have an alternative plan using UFPLS & EIS where I will not pay any income tax for the first 8 years of retirement and also wipe out my IHT bill.

1. Pension Withdrawal (£50,000/year)

• Taxable at 20%, so I would normally owe £10,000/year in tax.

2. UFPLS Withdrawal (£33,333/year)

• Completely tax-free.

3. EIS Investment (£33,333/year)

• 30% tax relief on this investment means £10,000 back as income tax relief.

• This exactly cancels out the £10,000 tax bill from the pension withdrawal.

4. Repeating this strategy over 8 years

At the end of 8 years. I have saved £80k in income tax and removed £266k from the value of the estate for IHT purposes. Plus I believe that £266k when left to the children can be disposed of without attracting CGT or income tax.

Yes I accept there is risk with EIS, but there is certainty of an IHT bill.

Is my thinking wrong.

NoMore

An UFPLS would not be tax free, 25% is tax free and the rest taxable, with no other income it would be about £30000 you would end up with.

Do you mean a FAD (Flexi Access Drawdown) where your only taking a tax free lump sum and crystallising £99999 in the pension?

Workerdrone

NoMore said:

An UFPLS would not be tax free, 25% is tax free and the rest taxable, with no other income it would be about £30000 you would end up with.

Do you mean a FAD (Flexi Access Drawdown) where your only taking a tax free lump sum and crystallising £99999 in the pension?

Quite correct, and I also realized my figures are wrong as I didn't include the personal allowance. I'm also using the wrong term. It seems I need to rethink this. I'll have a play and update. thanks

Workerdrone

Right,  Ive had a thought. Best I think I can manage is a £67 FAD, as 

Year	Annual FAD Withdrawal (£)	Tax-Free Amount Invested in EIS (£)	Taxable Income (£)	Taxable Income After Allowance (£)	Income Tax Due (20%) (£)	EIS Tax Relief (30%) (£)	Final Tax Paid (£)
1	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0
2	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0
3	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0
4	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0
5	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0
6	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0
7	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0
8	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0
9	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0
10	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0
11	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0
12	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0
13	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0
14	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0
15	67000	16750.0	50250.0	37680.0	7536.0	5025.0	2511.0

Keep_pedalling

On the second death your executor will not be able to claim your full RNRBs because your home is worth less than £350k, so maybe spend a little bit more of that £1M on a more expensive home.

Albermarle

Also with up to 10 separate EIS investments, be prepared for a lot of paperwork and hanging on the phone to HMRC.
That is what I understand, although I have never personally had one.

Linton

Couldn't your investment in an EIS lose far more money than you would save in tax?  Good safe investments dont need tax breaks to encourage people to buy them.

cfw1994

Linton said:

Couldn't your investment in an EIS lose far more money than you would save in tax?  Good safe investments dont need tax breaks to encourage people to buy them.

Indeed.
”Yes I accept there is risk with EIS” is doing a lot of heavy lifting in that first post 👀

Obviously I am all for avoiding unnecessary tax, but when the cost is a) different risks and b) complexity for those left behind, it feels fairly pointless.  Trusts: another area we have avoided for the second of those reasons 🤷‍♂️

As a wise man once told me: “if you’re paying more in tax, you’re earning more money” 💪
Generally true 👍

kinger101

Don't let the tax tail wag the dog.  Many of the tax efficient schemes like EIS leave one severely restricted in the types of assets one can invest. 
Same with the business exemption schemes for IHT.  60% of a fund that has actually grown can be worth a lot more the 100% of one that hasn't.  You only have to look at the FTSE AIM vs a global index to get the idea.

Workerdrone

kinger101 said:

Don't let the tax tail wag the dog.  Many of the tax efficient schemes like EIS leave one severely restricted in the types of assets one can invest. 
Same with the business exemption schemes for IHT.  60% of a fund that has actually grown can be worth a lot more the 100% of one that hasn't.  You only have to look at the FTSE AIM vs a global index to get the idea.

Im really just playing with ideas at this point. This forum is a great place to get different viewpoints. Your point on staying invested in a fund which grows is well made. I suppose I am just angry at the ideology of the current government and have no desire to fund them. Spite, certainly, Perhaps I am better just staying invested and finding a charity to bring me to below the iht threshold.

mostwelcome

The EIS investments if sensibly diversified should be a reasonable investment as well as an approach to tax planning – up to £1m can be IHT free, as you say there's no capital gains and you can claim the income tax relief. Two things to point out:

1. Probably a sensible idea to invest via EIS funds, rather than single company investments (unless you have a strong network and know some truly able entrepreneurs) – better for diversification, spread risk, get some real winners to provide returns

1. If you do invest through EIS funds, you likely wont have fully 30% income tax relief because of investment manager fees, so maybe plan on either investing slightly more to cover the charges, or count on receiving slightly less than 30% tax relief when all's said and done.