Higher rate Tax and Inheritance Tax Question

alun4

On the very recent sale of her bungalow and entering a residential home my 86 year old aunt now has an additional £240,000 bringing her total savings to £665000.
Her fees are £480 per week and she spends about £20 extra a week.

1. She has occupational pension income of £14,800 per annum (before tax)and state pension of £161 per week (including attendance allowance 0f £67 per week)

2. Her investments are building society, a few shares (about £70,000), Her ISAs are all cash ISAs and are up to date.

3. Her husband died 12 years ago and with a simple will left everything to my aunt so IHT threshold is £624000 at the moment.

She has this wealth because she has been very frugal and will not change ! She is in poor health. She has not given any power of attorney.

She hates the thought of Higher rate tax and of IHT

There are a few small bequests in her will (totalling about £18000) the remainder is left in equal proportions to 2 adult beneficiaries (no children) in equal share.

From the above you can see she hardly needs any income from her investments to fund her life. She is not likely to start giving to her beneficiaries at this stage except (maybe) excess of income over expenditure, where she may be encouraged to give to a joint account to mitigate some Inheritance tax.

a) Having seen her excess of Income over expenditure for last tax year can she "give" this now and then start a regular transfer this year to exclude some capital. ?

b) How can she concentrate investments (for what may be only a short time - though naturally we hope she goes on like the creaking hinge!) to get capital growth instead of income ?

c) Are there any suggestions for minimising IHT ?

d) Any other suggestions for help ?

A big multi faceted question that will surely be a common question for families with relatives selling homes to enter the residential/nursing home years.

Please help!

Rabiddog_2

Blimus, SHes done well in her life, lots of savings and a nice fat pension, unusual for a woman of her era.

Will she adopt me, please?

alun4

No, a very sad early experience made her very careful, she hasn't done holidays. Unable to have children. Will not have waste. Has never borrowed. Has walked instead of busses and cars. Her husband worked for a local authority and had poor income but a "good" pension. She worked all hours at all kinds of jobs and saved so there would be protection for the future ... paying tax as she has gone Making old things do has been a lifestyle but the sale of her home has added the large sum (It was bought for £1000.00).

localhero

Hi Alun 4,

In respect of the IHT situation she obviously exceeds her tax free threshold by about £41,000 therefore facing a liability of £16,400 when she dies.

First of all she should make use of any obvious allowances available £3000 per year as well as £3000 for last year's if she didn't use it.

Gifts out of income also allowable as long there is a regular pattern and it doesn't affect her living standards.

If she makes bigger gifts then she will need to live for 7 years - and as she's in poor health, probably not an option.

A possibility here is if she were to hold let's say £40,000 to £50,000 worth of AIM shares (Alternative Investment Market). These are smaller companies on a less regulated exchange.

These are regarded as 'business assets' and if owned for 2 years at the point of death are entirely free of IHT.

These types of assets can be a bit of risk in that their capital values could fall, but that said, there are some good solid companies around such as for example, Clark's shoes, Pizza Hut, Dominos etc.

Provided they didn't fall by more than 40% she would be better off. They could actually increase in value and are likely to pay dividends.

It is a bit of a punt at the end of the day and investment advice should be sought, but at this stage her options are very limited - so perhaps worth a thought as the alternative is paying £15,000+ in inheritance tax.

Can't help you on your other points though - sorry.

alun4

Hi Localhero,

Thank you very much for the details. We watched Wimbledon together today and she is quite worked up about leaving money to the chancellor after her days! I am sure she will place £3000 from this year and last year outside her estate by gift. It is only now that she can quantify the excess of income over expenditure for tax year ending 5/4/08 so could she "regularly" give this surplus (about £14,000) now and give this tax year's surplus (which we could now estimate at £1500 per month.) I suppose I am asking can she look back a year in this respect as well ? Who would "police" this?

Alun

tiptoe_mouse

Another optinon for your aunt, if she's concerned about giving money to the chancellor after her death, is to rewrite her will to leave anything over the IHT threshold to charity. I believe then no IHT would be payable.

HTH
tiptoe

localhero

Hi Alun4,

She can only make gifts out of income for the current year and so long as it doesn't affect her standard of living.

Nobody polices this as such, though when it comes to the probate process, the executors will need to disclose the extent of any gifts made in the past 7 years.

The Revenue & Customs can demand to see the financial records of the deceased if they suspect there hasn't been an accurate discosure of information.

There are fines and penalties that can be levied to which the executor(s) can become personally liable if there are any inaccuracies. If there is an element of dishonesty (rather than carelessness) on the part of the executors then it can also become a criminal matter.

alun4

Hi Localhero,
Thank you. I understand now. I guesss we will try for the maximum estimate of income over expenditure in this year and divide it by the number of months remaining and then show that as a gift made in the probate return with an explanation and calcultaions (if required) that the gift was in this excess/regular catergory.

Alun

Alun

localhero

Yes, your aunt would be advised to keep detailed records for at least 7 years of all her finances, and of course make the whereabouts known to her executor(s).

This will certainly assist her executors with the probate process.

sloughflint

alun4 wrote: »

Hi Localhero,
Thank you. I understand now. I guesss we will try for the maximum estimate of income over expenditure in this year and divide it by the number of months remaining and then show that as a gift made in the probate return with an explanation and calcultaions (if required) that the gift was in this excess/regular catergory.

Alun

Alun

Yes an estimate is fine and monthly adjustment can be made near financial end of year.
Your aunt can also make a larger payment now to cover April-June.
Regularity is key. Fluctuations in amounts are ok

Executors will need to complete a d3a form in the future so it would probably help to fill one out each year now.
http://www.hmrc.gov.uk/cto/forms/d03a_1.pdf

margaretclare

Her fees are £480 per week and she spends about £20 extra a week.

So, Auntie's living expenses are going to be £24,960 a year, plus £20x52= £104. Her income is £161.00 a week, £8372.00 a year. This latter is obviously not enough to cover all her living costs.

£24,960+£104= £25,064.00 - £8372.00 = £16692.00 to find for her living costs

Her assets at present are £665,000 in savings. Her IHT level is £624,000,so potentially £41000 would be subject to IHT. So it would take 2.5 years approx before she is below the IHT level, so hopefully if she lives another 3 years, no problem.

Just as an aside, the way this lady has lived is the way that many people of her generation were brought up to live. The fact that she bought a house for £10K and it has recently sold for silly prices, is something she could not have foreseen. Makes me wonder if we should have hung on to the Pennine cottage for which we paid £3K in 1973....it was 2 cottages really, 3 storeys, former weaver's cottage.....but no,I could never have coped with it in recent years, and in fact that was why we moved.

If more people lived like Auntie then we would not have the 'debt mountain' that we hear about so often, also people would not be so addicted to 'things we must have' paid for on credit, which are mostly ephemeral and forgettable.'Because you're worth it'....we have taken that to heart, haven't we, instead of the 'living with your means', 'cut your coat according to your cloth' and 'save for a rainy day' which is what Auntie was brought up on.

Shall we ever return to that way of thinking?