IHT mitigations (Inheritance Tax)

ljayljay

https://forums.moneysavingexpert.com/discussion/comment/82176176#Comment_82176176

Pretty much my outlook. This is a pension forum & in my opinion pensions are for spending. I just don't understand the mindset that tries to utilise pensions to mitigate IHT liability.

In recent years we have been financially fairly secure. We have helped all our children & grandchildren whilst we are here to enjoy it with them. Far more satisfying than stressing on IHT on assets over £1 million.

In particular we treat all of them to holidays to spend with us in places that they can't currently afford. As a result we have built fantastic memories with our grandchildren, which hopefully they will also cherish when we are long gone.

Because of the house our estate may or may not be liable to IHT. However, apart from a million they would still inherit 60% of any excess so still plenty.

poseidon1

https://forums.moneysavingexpert.com/discussion/6687584/iht-mitigations-inheritance-tax

Depending on your total exposure to IHT and your current ages and state of health then a joint life 2nd death life policy in trust, is definitely worth exploring to provide your children with a tax free pot to assist with paying the IHT after both of you pass.

Of course you are not avoiding IHT with this method merely providing a tax free pool of money to handle the tax fallout when it comes. Depending on monthly cost of the premiums, you may need to consider triggering 45% tax on increased drawdown to help fund the policy, but if you have a large enough ISA pot I would certainly not be eroding that unnecessarily, its far to useful a source of tax free income compared to your Sipp especially for you guys north of the border..

As for DGTs, my firm have deployed these for clients in the distance past, but despite the relatively low entry minimum of £25k +, I would only considered them for people for whom an investment of at least £500k would still leave them with very substantial uncommitted liquid funds. The complexity of setting these things up, militates against investing less than 6 figures

They should also be happy to receive a relatively low withdrawal rate of say 3% from the DGT (rather than the maximium 5%), to give the underlying investment a decent shot at annual growth, bearing in mind the withdrawals cannot be halted or deferred once started.

Marcon

https://forums.moneysavingexpert.com/discussion/comment/82176304#Comment_82176304

Fifth and often overlooked: if you are in a committed relationship but not married or in a civil partnership, get hitched! No IHT on transfers of assets between spouses/civil partners. It might mean more IHT payable on the second death, but at the very least it'll push the problem down the road.

Yellowkite

Many thanks for all the comments so far. A quite varied list and several interesting angles. I'll need to give them some thought and maybe add a few comments.

Yellowkite

A common theme is spend your pension, enjoy it, or gift it, and end up with nothing, or at lease under the IHT threshold….

…………so I think I / we (married couple with adult children) are attempting to do all those things whilst ensuring we maintain a “flight path” that ensures we don’t run out of money / pension.

Annuities as retirement income stream……

…….I’ve generally not considered (maybe don’t know enough), but might be worthwhile as a bottom slice of pension fund?

IHT why bother about it…….

….I understand the point but, let’s say a pension fund sees great growth over several decades, then for the marginal £1k in the estate the IHT charge is 40%, then beneficiaries may also have to pay their marginal rate, say 25% / 45% (age 75 rule). So that rolls up to 55% / 67% total tax applied. I’m guessing not many people wants to give the taxman that much.

Gift early and gift often……

…..that seems a nice and clean message

Age 75 etc…..

…….I for sure understand what life can throw at you.

Charity versus donation to the UK State….

…….interesting choice, probably not a difficult one.

This is a pension forum & in my opinion pensions are for spending. I just don't understand the mindset that tries to utilise pensions to mitigate IHT liability……..

………that’s not really what I am doing at all. Anyone managing a pension fund has to plan for 30 / 40 years. There are lots of potential peaks and troughs along the way due to markets etc. So running out of money, or fund doing well, are both possibilities to be considered. IHT was certainly never a consideration when I took my CETV.

LIITs….

…might be worth considering at various points along the way.

DGTs…..

……they do seem complex, and the investment suggested seems pretty high.

thanks again for your comments.

Marcon

Annuities as retirement income stream……

…….I’ve generally not considered (maybe don’t know enough), but might be worthwhile as a bottom slice of pension fund?

For ages annuities have been dismissed as 'poor value', 'inflexible' etc etc and, wholly understandably, people steered clear.

The reality is that for some years annuity rates have been steadily climbing. The problem is that mindsets (and knowledge) haven't caught up. So much for the wisdom of the crowd!

Have a look at https://www.which.co.uk/money/pensions-and-retirement/accessing-your-pensions/annuities/annuity-rates-aQGfH6W5n2rm

Triumph13

Two tips:

1. Think about IHT in the round, rather than at the margins. A £2m estate for a couple only suffers 20% IHT overall, which doesn't seem too unreasonable.
2. Discount your pension number by the tax you'll have to pay when you take it out. If you have £1m and are a 45% taxpayer, then get used to thinking of it as worth £550k. That will make the IHT feel less crazy.

artyboy

OK. So essentially in the same boat as the OP - we have 2 very large pension pots that under the new rules would more than double our total estate (except that our DC pensions were always DC and not transferred with at least the partial intent that we could avoid IHT, ouch!)

Personally we're not messing around with complex trusts, far too many stories of the headaches they create for beneficiaries, and the fees they generate for professionals.

Expatriation (hello Portugal!) was at one point an attractive option, but Brexit effectively killed that off too.

So now that plan is simply to draw income close to £100k each per year (or whatever the 40% bracket goes to in future), spend what we need, ensure we have a decent ISA fund in case we dare to live much past 90, give away some excess to children and good causes, and generally have as good a time as possible.

Insurance written into trust might be a possibility but I've not thought much about it, yet. Ditto using a bit of the pot for annuities, if rates hold up for the next few years.

I do however think that the tapering off of RNRB for estates over £2m is a bit of an egregious one, so dying with less than that is a reasonable target. Albeit an extremely first world one!

mrklaw

https://forums.moneysavingexpert.com/discussion/comment/82177678#Comment_82177678

for this

….I understand the point but, let’s say a pension fund sees great growth over several decades, then for the marginal £1k in the estate the IHT charge is 40%, then beneficiaries may also have to pay their marginal rate, say 25% / 45% (age 75 rule). So that rolls up to 55% / 67% total tax applied. I’m guessing not many people wants to give the taxman that much.

I’d say

if you have high growth for decades you also have decades to be monitoring and adjusting your spend/gifting while able to see its benefits. If you prefer to avoid IHT then part of your goals during retirement will be making sure you don’t run out of money, and part will be trying to land in a pretty big £1m landing zone. That should be something you can adjust to pretty well.

and I’m not personally a fan of the ‘double taxed’ scaremongering (not you, but a lot of youtube channels ran with it). that part is no different than inheriting a pension now. if you inherit befoer 75 its tax free. if over 75 its taxable at marginal rate. But ‘oh 40% tax twice’ is a bit unbalanced IMO. If eg your kids inherit, they can control when they draw from it. eg it could form part of their own retirement plans when they’d draw at a lower tax rate. Its not all or nothing, and they are in control.

Yellowkite

annuities have been dismissed as 'poor value', 'inflexible' etc etc and, wholly understandably, people steered clear……

……I’ve probably been in that camp. But rates can change as you say, and you can take advantage of that. Maybe timing is right now. (But seeing how easily a government can drastically change tax laws means setting a pension plan has really now become a minefield).

Think about IHT in the round, rather than at the margins……

…..I think that mindset probably would help, but a career thinking about business costs and profits “at the margin” is a hard mindset to shake.

Personally we're not messing around with complex trusts, far too many stories of the headaches they create for beneficiaries, and the fees they generate for professionals.……

….. I think my position is that too. Even with a lawyer best friend who’s not convinced me how worthwhile it could be.

draw income close to £100k each per year ….

……an obvious breakpoint for sure

and generally have as good a time as possible……

…….always a good rule if possible

tapering off of RNRB for estates over £2m is a bit of an egregious one……

…….agree, the some of the cliff edges are crazy. Reminds me a bit like when I was in industry and the power station manager would ask “are you sure you need another 1 tph of steam, because I’d need to put another boiler on” (sharpens the mind).

high growth for decades …..part will be trying to land in a pretty big £1m landing zone……..

…….For sure. Given that we see all sorts of tax rules / bands not keeping up with inflation (fiscal drag), I can envisage that in 20+ years there might be a lot of people in future with IHT issues when their house and pension are thrown together, but maybe that’s the idea.

Some more background to this interesting conversation. My working life has luckily included DB pensions with various rules. Until c 8 years ago, shortly before my retirement, my company sold the business unit I worked for. I’d almost never heard of SIPPs, but a small group of colleagues had gotten together to consider CETV, and I think at the time multipliers were favourable due to yields etc. So I jumped in. It’s been an extremely interesting journey (I like numbers). It’s certainly not without it’s workload. Nor stresses with bumps along the way, like Covid, 2022 etc. But ultimately worthwhile due to firstly access at 55, and secondly being able to vary drawdown, even if thirdly the passing of your pension pot now has rule changes.