Offer of "gifts from income" from Mother - concerns

YBR

My mother is over 80 and its been suggested to her that now her pension pot is subject to inheritance tax, a way to avoid it is to give "gifts from income" meaning they wouldn't be part of the estate for inheritance tax (7 year rule?) Proviso that should she need paid-for care that we use that money to pay for it "ourselves".

We couldn't assume she'll survive another 7 years, and I think this came from a friend rather than professional advice.

I'm aware that there are issues from reading this forum, but I'm not quite sure. Please help me elaborate why it may not be a genius idea!

Context: I have just started a role where housing is provided, DH and I also own outright a house which will shortly be on the rental market. 

Are these valid concerns? 

(1) If our situation changes, then we would Have to use these funds to support ourselves until depleted to benefits levels?

(2) If something goes wrong with the tenancy resulting in some liability, and LL insurance doesn't cover it, similarly "her" funds are not safe?

(3) Should DH and I split and divorce the funds would be seen as ours and not ring-fenced for her potential care needs?

(4) Means we have the issue of stewarding "her" money and likely having to pay tax on interest earned? Plus emotional pressure if funds to cover her care don't last as long as she does?

(5) Could complicate her care funding with deprivation of assets, although it's not the idea to rely on LA funding so I guess this might only apply should we run through all her savings?

(6) Might not work in terms of reducing inheritance tax if seen as avoidance/evasion?

Keep_pedalling

Let’s start with the basics, and determine whether her estate would actually have a IHT liability when it eventually hits pension pots.

What is the value of her pension pot? Is she already drawing down from it.

What is the value of her estate and how much of that is licked up in the value of her home?

What is her marital status? 

Marcon

If your mother is over 80, are you quite sure she has a pension pot at all? Pension holders in her age group typically have a defined benefit pension, which doesn't have a pot (so won't add anything to the IHT bill because there's nothing to leave to anyone other than a spouse or 'eligible child' - usually upper age limit usually no more than 23).

Even if she did have a defined contribution pension (a type of scheme which has a 'pot'), are you certain she didn't use it to buy a lifetime annuity for herself (possibly plus some tax free cash)?

Your post suggests a number of areas of possible misunderstanding, so perhaps before going any further some properly informed professional advice, based on an understanding of the whole situation, would be the safest way to proceed.

Emmia

Gifts from excess income should be exactly that... Gifts (without strings) these sound like gifts with a reservation of benefits - i.e. her future care

Do your mum's pension(s) pay her more each month than she spends in the normal course of events? Yes? If so, she can gift from that excess.  But she can't gift out of her savings, or gift out of her pension income and then live off her separate cash savings to benefit from the "gifts out of excess income rules".

The reality would be a monthly "gift" of money - so potentially a relatively small amount each month, rather than a one off larger payment. 

https://hwfisher.co.uk/gifts-out-of-surplus-income-three-rules-to-remember/

tacpot12

All of your concerns are valid. Some of the outcomes are unlikely, but there is enough risk of problems to be very wary of such a scheme. What's so bad about paying inheritance tax anyway?

YBR

tacpot12 said:

All of your concerns are valid. Some of the outcomes are unlikely, but there is enough risk of problems to be very wary of such a scheme. What's so bad about paying inheritance tax anyway?

Thanks @tacpot12 I'm quite happy to pay the tax due when the time comes myself, it's Mum wanting to do this, it's not the first scheme she's suggested (I think she has a friend(s) intent on keeping their wealth from the tax man).

I'll add "gifts with a reservation of benefits" to my concerns!

As for other questions, I don't know the answers to all of them but ...

Mum is widowed; my parents ran their own very small business so there was a contributory pension fund pre-stakeholder days, I know Dad had it in drawdown rather than annuity but I'd have to confirm whether Mum is doing the same. Other income will include state pension and likely annuity(s) and investments. 

She has said she doesn't need all her income.

Potential estate value: her current home is valued around £790k, so even with 2x(Tax-free allowance plus residence nil-rate band), I'd say some Inheritance tax liability is likely.

Thanks for your comments. I've got a better idea how to dig into this.

Keep_pedalling

With an estate in excess of £1M there is little point in worrying about deprivation of assets, even if she used up all her savings she has the sale of the house to fall back on to cover care costs.Gifts from excess income is also not going to make much of a dent in any potential IHT liability as all it does is stop your income increasing that liability rather than decreasing it.

Lets say she has £200k sitting in her pension pot, she can’t just draw out £50k per year and give it away and claim that it all excess income as that is not a sustainable draw down rate. Even if that was possible, with her other income, she could would also be paying income tax on all of that and quite a lot of it at 40%.

Baring this in mind I don’t think your questions 1-5 are relevant. As for 6 If only genuine excess income is claimed then tax evasion is not an issue but any IHT savings will be fairly minimal and will be offset by income tax when she draws the money. 

To claim the form excess income exemption is also rather a pain as the executor need to provide detailed information on 7 years expenditure as well as the amount gifted. Have a look at page 8 of form IHT 403 to see exactly what is required.

https://assets.publishing.service.gov.uk/media/5f60b44cd3bf7f7234487bf0/IHT403-05-20.pdf

Linton

YBR said:

My mother is over 80 and its been suggested to her that now her pension pot is subject to inheritance tax, a way to avoid it is to give "gifts from income" meaning they wouldn't be part of the estate for inheritance tax (7 year rule?) Proviso that should she need paid-for care that we use that money to pay for it "ourselves".

We couldn't assume she'll survive another 7 years, and I think this came from a friend rather than professional advice.

I'm aware that there are issues from reading this forum, but I'm not quite sure. Please help me elaborate why it may not be a genius idea!

Context: I have just started a role where housing is provided, DH and I also own outright a house which will shortly be on the rental market. 

Are these valid concerns? 

(1) If our situation changes, then we would Have to use these funds to support ourselves until depleted to benefits levels?

(2) If something goes wrong with the tenancy resulting in some liability, and LL insurance doesn't cover it, similarly "her" funds are not safe?

(3) Should DH and I split and divorce the funds would be seen as ours and not ring-fenced for her potential care needs?

(4) Means we have the issue of stewarding "her" money and likely having to pay tax on interest earned? Plus emotional pressure if funds to cover her care don't last as long as she does?

(5) Could complicate her care funding with deprivation of assets, although it's not the idea to rely on LA funding so I guess this might only apply should we run through all her savings?

(6) Might not work in terms of reducing inheritance tax if seen as avoidance/evasion?

If these are true gifts:
1) Yes
2) They would be your funds, not Mother's so her liabilities are irrelevent
3) Yes - similarly if you die first
4) You have no issues regarding stewarding her money since it would be your money. Yes you would have to pay any tax due.
5) Yes it's your money. If mother does not have the money to pay for her own care and wants council help to cover the costs any significant gifts she makes could be regarded as deprivation of assets. In that case the council could simply refuse to pay.
6) Any evidence that these were gifts with reservation could lead to them being included in Mother's estate even outside the 7 year limit that would apply to real gifts. 

SadCodeMan

Keep_pedalling said:

 IHT savings will be fairly minimal and will be offset by income tax when she draws the money. 

With the caveat that 'Who knows after April 2027' someone would be paying income tax on the withdrawal even if it is done after the pension is inherited obviously so it maybe doesn't seem as bad as it might do at first glance though so don't forget to 'offset back' that saving.

There is also possibly (but I have no idea of the estate value) the question of the claw back of the 350K residence band if the estate is over 2Million. At the marginal rate, that could make things a bit more favourable in some cases if it prevented some of that.

As an aside - Why can we not have a simpler tax system! 

Not saying that is is a good plan or not. Just info!