IHT mitigations (Inheritance Tax)

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82180588#Comment_82180588

I was never an accountant, and to prove it - I hate spreadsheets !

Aretnap

Although I can understand the view that IHT exemption of unused pension pots was a loophole, as an unexpected sideshoot from the Pensions reforms of 2015.

It wasn't a loophole or an unintended consequence though. It was a deliberate policy choice on the part of the Cameron/Osborne government of the time. With the abolition of the need to buy an annuity the number of people dying with money still left in their pensions was expected to increase dramatically, so the government was forced to consider what the tax treatment of that money would be (previously it had been a fairly obscure bit of tax law).

They could have simply chosen to leave the old system in place and kept the blanket 55% tax charge. Perhaps they thought that would have given people too much of an incentive to withdraw too much too quickly - the papers were already full of speculation about people withdrawing their entire fund to buy a Lamborghini.

Or they could have chosen to have it paid into the estate on death and be subject to inheritance tax.

Or they could have chosen to tax withdrawals as income for the beneficiary, regardless of the age at which the pension holder died.

Or they could even have chosen to let the whole lot be passed on tax free regardless of the age.

Or they could have chosen any of a dozen other options.

But they chose instead to adopt the current slightly strange hybrid system where the tax treatment was extremely generous if you died before your 75th birthday, but merely very generous indeed if you died after it.

I'm not sure whether the reasons behind that choice were ever publicly discussed - the discussion in the media at the time was all around poor annuity rates vs pensioners buying Lamborghinis. But there was certainly a reason behind the choice, even if it was not necessarily a good one, or a political reason rather than an economic one. The new system was deliberately created alongside the pension freedoms - it didn't fall into place by accident.

In any event though, over a period of decades and multiple changes of government, tax policy is going to change from time to time. The fact that a very generous tax break which doesn't really serve an obvious public policy objective is being cut at a time of strain on public finances isn't something that should really come as a shock.

DairyQueen

https://forums.moneysavingexpert.com/discussion/comment/82180690#Comment_82180690

Perhaps we can look forward to a review of a pension policy that 'doesn't really serve an obvious policy objective' at a time of strain on public finances. Public sector pensions are now beyond affordable at the current generosity of benefits. The private sector are no longer willing to subsidise the level of pensions that are many multiples more than are available to them. A reduction in these benefits shouldn't 'really come as a shock'.

af1963

https://forums.moneysavingexpert.com/discussion/comment/82180722#Comment_82180722

This is getting a long way from the thread topic of "IHT mitigations", but whatever the merits or otherwise of public sector pensions, they can't be passed on to the next generation (other than some having provisions to support dependent children)

DT2001

Going back to about 2013 MIL was advised to create two DGTs and 2 PETs. A couple of years later she used some of her excess income to fund son’s pension. Over the next few years residential property relief was introduced and all investments were geared towards income and everything from her ISAs was gifted to children/grandchildren. Her estate is at the moment just under the £1m mark BUT the overriding focus is being able to pay for any future increase to care/help so a small part of her portfolio is still growing.

We will ‘move’ any inheritance straight on to the next generation. We are also making PETs to help our children get on the property market. At the moment we will lose the property relief. We have a foreign holiday home which is taking a long time to sell so have used other assets to help the children. Also looking at getting a better handle on excess income gifting as at the moment we fund family holidays etc etc but think there is more we can give. OH is still enjoying working and like many our investments have done well over the last few years - we have moved investments into income generation (5%+ ave) which will reduce total pot required allowing more to be passed on.

SouthCoastBoy

The IHT changes encouraged me to stop working, so I guess it could be seen as a positive thing for me.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82182386#Comment_82182386

It can also be an encouragement to spend more and give more away.

Yellowkite

The IHT changes encouraged me to stop working, so I guess it could be seen as a positive thing for me……

……what a response to a tax change, well done to anyone that can make that work

AA, PETs and gifting from excess income – We will use AA. And occasional PETs (e.g. to help flat purchases).

DGTs….

…….still not sure whether they are worth considering, I would need more understanding.

This year I’ve focused on gifting from excess income. In particular I’ve increased pension drawdown to allow increased gifting from the excess income. I just need to double check my numbers. And to help with this I’ve replicated the IHT 403 section 20 on a spreadsheet, so I can make sure the gifting story is robust. (Partly I’m doing this because my wife is not really interested in the financial planning, and she probably quite rightly says our financial set up is a bit complicated……and she doesn’t want to have to sort it out…..ha…….hence I have allocated responsibility to my children….).

On the subject of pension fund performance. On the one hand I started this thread on IHT Mitigation. Because I think you always have to address any rule changes, and this has lead to a lot of options like spending more / gifting etc. But on the other hand I’ve not just gone for the “simple life” of the 4% rule whilst invested 100% in bonds. I’m still essentially 100% in equities, with a short term cash float of 1+/- years drawdown to cope with market drops.

I’ve also pulled my equity investments to cash a couple of times when geo political events seemed to be likely to affect the market, e.g. Covid, 2026 global tensions / inflation etc., but I didn’t do it for market of 2022 (I nearly did) or Trump tariffs. This is probably a bit hap hazard, but the overriding idea is to avoid a c 30% fund loss that may take say 6 months to 3 years to recover, Who knows what will come next?

LHW99

https://forums.moneysavingexpert.com/discussion/comment/82182537#Comment_82182537

Risking not enough for later care, and putting yet more strain of the social care system. I agree a pension is for keeping you in comfort (hopefully) when you retire, but people do also put money in their pension over and above that to provide themselves with a buffer for future unexpecte costs.

With pensions getting included in IHT, I fear too many people will only put in the minimum. Whether they will decide to save in other products is a moot point.

Linton

https://forums.moneysavingexpert.com/discussion/comment/82182629#Comment_82182629

The problem is that you cannot predict when a 30% or worse crash will happen. There is the danger that it comes as a surprise and you lose a serious amount of money but there is also the danger that you lose out on equity growth if you derisk for a crash that does not happen. Then there is the stress of continually following the markets looking worrying about ominous signs..

The way I deal with this is to split my investments according to the timescale when I plan to use them. So there are lower risk assets to guarantee the next 5-10 years and 100% equity for long term growth. Then the risk of a crash can be ignored because one won't seriously harm me in the short/medium term and in the long term there is plenty of time for prices to recover.