Higher rate Tax and Inheritance Tax Question

alun4

Hi Margaretclare,
Her income is more than that as her late husband/her pensions are £14800 and there is the interest and dividends on the capital sum at ? rate interest. I do not see the sum coming within IHT threshold at the present levels.

Alun

margaretclare

alun4 wrote: »

Hi Margaretclare,
Her income is more than that as her late husband/her pensions are £14800 and there is the interest and dividends on the capital sum at ? rate interest. I do not see the sum coming within IHT threshold at the present levels.

Alun

Ooooops. Sorry about that.

However, her living expenses still exceed her income by £10,264 a year. It would take approx 4 years for her to fall within the IHT allowance, and who knows, that allowance may rise, especially if we get a change of government in 2 years' time.

Obviously can't take into account dividends and investments - don't know about Auntie, but my investments have plummeted in recent weeks, FTSE now at its lowest point for some years.

Given Auntie's stated aim of not leaving money to the Chancellor, there seems little point in her continuing with investments and savings now! I realise that she's unlikely to change the habits of a lifetime, wouldn't enjoy an expensive holiday or anything like that, but the ideas given by localhero and tiptoe_mouse seem to be good ones.

sloughflint

margaretclare wrote: »

However, her living expenses still exceed her income by £10,264 a year.

Current living expenses= £ 26 000
Gross Pension income = £ 23 172

Difference= £ 2 828
But don't forget to add the interest /dividends etc and deduct income tax.
Income will significantly exceed expense not the other way round.

If Op's aunt would like to use her gift from income allowance, she can estimate the monthly amount and adjust accordingly.

Gift from Capital is often mentioned on MSE but I rarely see Gift from Income mentioned.
Add:
Unlikely to apply to OP's aunt, but although it's the regularity that is key, the gifting can be paused/stopped if circumstances change without affecting the classification of the gifts.

jem16

margaretclare wrote: »

Ooooops. Sorry about that.

However, her living expenses still exceed her income by £10,264 a year. It would take approx 4 years for her to fall within the IHT allowance, and who knows, that allowance may rise, especially if we get a change of government in 2 years' time.

Margaret I think you need to get your calculator out again and perhaps even read the posts carefully.

Auntie has £14,800 of occupational pension plus state pension of £161 per week so total income of £23,172. On top of that she has investment income.

The OP has already stated that Auntie has about £14k of income left over after paying all living expenses.

Giving away that excess each tax year as suggested seems to be one way to go to get the amount under the IHT threshold.

How about perhaps arranging for some of the money from the house sale to be placed into something like an Investment Bond which can be placed into trust? This would take that money out of IHT. Best to see an IFA for this.

localhero

Giving away the excess income will not deal with the problem of being £40k over the threshold though - capital wise.

If she makes full use of her allowances and survives until the 2010 tax year she will be able to leave an estate worth £700,000, because the nil rate band will be £350,000 in that tax year.

EdInvestor

TBH I'm a bit surprised that people are worried about paying potential IHT of 16k on an estate worth in excess of 600k.

That's 2.6%.OK people don't like paying tax, but really. :rolleyes:

Give the excess income to the family or to charity.

margaretclare

EdInvestor wrote: »

TBH I'm a bit surprised that people are worried about paying potential IHT of 16k on an estate worth in excess of 600k.

I thought of that too, Ed.

I also wondered - what is the point of continuing with all the investments? Investing, I've always been told, is a long-term aim, mid-to-long term at least, 5-10 years. Auntie will just continue to accrue more capital, and her problem is that she has too much already. Never having had much throughout most of her life, now she has enough never to have to worry again about 'can I afford....' But this fact is what is causing her so much worry, so much so that she couldn't even enjoy watching the tennis but had to keep worrying about what will happen to her money after she dies.

sloughflint

margaretclare wrote: »

But this fact is what is causing her so much worry, so much so that she couldn't even enjoy watching the tennis but had to keep worrying about what will happen to her money after she dies.

This is not uncommon.

Hopefully she will be a lot happier when OP explains to her that using full capital and income allowances will significantly reduce her IHT liability.
If she is hopefully still alive next April, the IHT bill would drop to £ 2400
0.4*( 665 000-2*325 000-3*3000)
and as localhero stated zero the year after.

alun4

Local hero. Thanks I have printed the form which we will keep.

Margaretclare. Living expenses will be about £26000 this year. Occ Pensions £14800 + state (£94 per week taxable +£67 Attend Allow (non taxable) = £8372 ....... sub Total £23172 PLUS Income from Investments (now £665000 @ say 4.5% + £29925 TOTAL £53097 (mostly taxable)

Jem16 I went to a "specialist" department of her bank this morning (Lxxxds Wealth Management) They worked out a bond with fairly high spread of "Gov Bonds" emphasis which would use/exempt any cap Gains liability but would attract income tax on interest. Fees were 1 1/2% +annual and no mention that it was possible at this stage of her life to effectively write into a trust to get amount away from IHT

EdInvestror I am sorry I did not explain properly. She is worked up and worried about paying tax twice. She has worked and honestly saved paying her taxes all her life and sees people who have chosen not to be frugal ......... She is 86 and it is her mindset we are trying to deal with and help. When you turn 2.6% into money she takes it back to what in her life was £17000. She has given her time to charity and friends all her life but not her money. At 86 she had nearly 100 cards last Christmas (with a very small family circle)
Margaretclare She is from an age and experiences of not so much "can I afford" more of "how can I save to make the future safe" She has more than arrived there but we can't change her core at this age. We are simply seeking to help her fee as good as she can about everything.
As Sloughflint says This is not uncommon

Thank you all for your imput.

Regards,
Alun

jem16

alun4 wrote: »

Jem16 I went to a "specialist" department of her bank this morning (Lxxxds Wealth Management) They worked out a bond with fairly high spread of "Gov Bonds" emphasis which would use/exempt any cap Gains liability but would attract income tax on interest. Fees were 1 1/2% +annual and no mention that it was possible at this stage of her life to effectively write into a trust to get amount away from IHT

The type of Investment Bond I'm referring to is an insurance product. It's normally for higher rate taxpayers and those wishing to avoid IHT - it's also normally at least a 5 year investment so may be entirely unsuitable for your aunt. However lookin at your estimate of her income being £53,097 she will be a higher rate taxpayer.

For example;

http://adviser.norwichunion.com/product-literature/files/in/in50043c.pdf

I strongly advise seeing an IFA and not a someone within a bank. With this kind of money she should be looking for ways to help her with tax planning.