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IHT Planning
Comments
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Sounds risky, better to leave them nothing, I’m sure your family will value this decision.
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My goal is to leave a legacy to my family, but my closest relations are brothers and nieces so I will not get the RNRB if I move to the UK. Right now I’m making DC pension withdrawals in the US at a marginal IT rate of 24% and putting the money into the US equivalent of an ISA which is tax free in both the UK and the US. Then I can make some tax free lump sum gifts to my nieces before I move to the UK and come within HMRCs net, although there is now a 4 year grace period for foreign income for new residents instead of the old non-dom rules. I will probably accelerate my transfers and pay US tax at the 32% marginal tax for a few years and will have to take advice on whether distributions from these US tax free DC pension accounts count as excess income.
And so we beat on, boats against the current, borne back ceaselessly into the past.1 -
Indeed. I have a brother and niece, and godchildren. So I will be left with only the non-increasing NRB of £325K. I will incude > 10% to charity in my will, so as to reduce the IHT rate to 36% on current rules, but given I have only my own resources to rely upon, wouldn't want to give away too much while alive in case I need to fund future care costs for myself. I'd rather pay IHT than run short.
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Isn't the point though that by planning effectively and gifting regularly then the capital does not accrue and get you to a point where it is marginal decision.
Houses and other assets will increase and we have little control. With DB and SP building on top of more expensive housing the gap might close very quickly.
Effective and sustained gifting sets the pattern that can be verified. Yes it might require some effort to track outgoings but consider the hourly rate for tax saved and see if it makes sense and is worthwhile .
Trying to play catch up later might be too late. Especially if future governments seek to close the opportunity down.
Your life is too short to be unhappy 5 days a week in exchange for 2 days of freedom!1 -
RNRB also tapers away to zero once your estate is above £2m - I suspect quite a few estates will get caught out by that where there are sizeable residual DC pension pots involved.
Unlikely to engender any sympathy from the masses, but when you stack that on top of the base IHT and then the marginal income tax rate for a beneficiary on withdrawing that pension… Well, I haven't done the sums, but I'm guessing it could end up being above an effective 80% tax in certain cases.
And that for me is the rationale for draining large DC pots as quickly as possible, and potentially making gifts out of the surplus income. Use other income sources and potentially downsize later on if needed.
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I'm staring down the barrel of this, with 60% IHT on the £2m to £2.7m band. Ouch. I'm just at the bottom of that range now, but with frozen thresholds and appreciating assets it will become more and more of an issue.
My planned mitigations are:
1 Gifting non-pension assets before I'm 68
That way, if I die within seven years, the IHT cost is offset by the tax saving on the DC pension by dying pre age 75 (unless the rules change of course)
2 Using 40% IT band to move from DC to ISA
40% IT followed by 40% IHT leaves 36% for the kids. That beats 60% IHT followed by 20% IT, which only leaves 32%. (24% if the kids are higher rate tax payers.)
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On the income tax to be experienced by non exempt beneficiaries drawing on an IHT taxed pension pot, there is supposed to be a vaguely outlined system that allows such beneficiaries to obtain a credit for IHT paid against income tax due on future withdrawals from the remaining pot.
The system is loosely set out at point 8.2 of the (turgid) technical briefing note kindly circulated by @Snowman today -
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I think that is for income tax on death benefits, not income tax on beneficiaries drawing on an IHT taxed pension pot. Death benefits are only subject to IHT if they exceed a threshold and I think 8.2 says that income tax on death benefits will be applied to the net amount after IHT has been deducted.
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The way I read it ( and I could be wrong), is that a beneficiary of a DC pot from someone who died over age 75, will only be liable for income tax on withdrawal of money after IHT has been extracted from the pot. Which is pretty obvious.
However they say if someone paid income tax on the whole pot ( presumably by quickly withdrawing all of it) and then IHT was payable, then they could claim a rebate on the income tax already paid on the IHT part.
I think people were hoping that if IHT was paid from the pot, then there would be reduced income tax on the remaining funds on withdrawal. I am not sure it says that .
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Yes, that's how I read it but the section applies to death benefits, not an inherited pension pot.
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