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IHT

Practical Issues
UnclePhilip
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IHT

#278574

Postby UnclePhilip » January 19th, 2020, 5:06 pm

My wife and I have between us the usual IHT nil rate bands (both unused) plus family home going to our offspring, taking transferable accumulated nil rate band up to £1m next tax year. Now we're looking at the value over that sum, and how to so order our affairs as to reduce potential IHT.

Putting aside trusts for now, the obvious consideration is to look at giving them as much as we think we can afford to do without. And then live at least 7 years....

However, as my life expectancy is not looking too rosy, I'm beginning to wonder how these gifts work.

Q1: If a gift is made from jointly owned funds, can I be confident that only one of the joint givers needs to last 7 years?

Q2: As a significant wedge of our wealth is in ISAs, which are of necessity individually owned, is there any way that my ISA wealth can get to them without suffering IHT?

Q3: If not, would we have to rely on the value transferring to my wife via the 'additional permitted subscription', then she gifts it and hopes to live 7 years? She seems not to feel the same enthusiasm as I do with regard to suttee....

monabri
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Re: IHT

#278585

Postby monabri » January 19th, 2020, 5:49 pm

I think (think) that as regards #1 - the gift will be treated as though you gave 50% of the sum and your wife gave 50% - effectively no different to if you had paid it out of separate accounts. The extent of IHT to be paid will then depend on your individual assets and IHT allowance.

viewtopic.php?p=41817#p41817

I don't believe that a child can inherit their deceased parents ISA and preserve the tax free wrapper..they can be transferred to spouse/civil partner with no loss of the tax free wrapper but not passed down the family line.

scrumpyjack
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Re: IHT

#278591

Postby scrumpyjack » January 19th, 2020, 6:14 pm

Don't forget that you can give money to your wife and she can then give money to your children, (though not your ISA until she has inherited from you). If she is expected to live longer this may be worth doing. You can switch assets out of joint ownership to your wife's sole ownership.

Also consider if you have a personal pension. This may be able to be left to your children (by an expresssion of wishes to the trustee) without IHT. So you may be better off spending other assets rather than drawing from the pension.

Lastly you can make gifts out of income IHT free, so long as they are regular and do not diminish your standing of living.

monabri
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Re: IHT

#278595

Postby monabri » January 19th, 2020, 6:32 pm

You could each give a £3k gift and make use of last years allowance if not used. So, you could reduce your pot by £12k and then by another £6k ( £3k each for you and your wife) in April's new tax year.

Lootman
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Re: IHT

#278597

Postby Lootman » January 19th, 2020, 6:51 pm

UnclePhilip wrote:As a significant wedge of our wealth is in ISAs, which are of necessity individually owned, is there any way that my ISA wealth can get to them without suffering IHT?

One of the ironies that derive from the iniquity of the inheritance tax rules is that the very things that are tax-efficient in your lifetime (primary homes and ISAs) are tax-inefficient when it comes to IHT.

Why? Because both are difficult or impossible to transfer or gift, and therefore cannot be immunised against IHT unless you liquidate them.

This is not such a problem upon the death of the first spouse, but does become so upon the death of the second.

There are far more options for making IHT go away if all these tax-"efficient" assets are sold off, as it's a lot easier to liberate cash from IHT than illiquid assets.

fca2019
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Re: IHT

#278603

Postby fca2019 » January 19th, 2020, 7:32 pm

Sorry to hear you have health issues.

Joint gifts are included in your estate at 50%. Could choose to gift up to 650k to your children/other. The value for probate on each estate is 50%, i. e. 325k which would use up your nil rate band.

The remainder of your estate can pass to the surviving spouse free of iht using spouse exemption. If the surviving spouse lives over 7 years from the date of gift the drops off their estate.

In this case, you can have an estate of up to 1.65m, if gift 650k and if the surving spouse lives over 7 years, not pay iht on either estate. Under current legislation.

Anyone who knows different please correct.

PinkDalek
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Re: IHT

#278648

Postby PinkDalek » January 20th, 2020, 2:46 am

Joint gifts are included in your estate at 50%. ...

Anyone who knows different please correct.


Thanks for the prompt but I hope to in due course. If I forget, study this:

https://www.gov.uk/hmrc-internal-manual ... /ihtm15042

Applying the Inheritance Tax provisions (IHTM15012) to joint accounts can be particularly difficult. In practice: ...

Lootman
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Re: IHT

#278668

Postby Lootman » January 20th, 2020, 8:17 am

fca2019 wrote:you can have an estate of up to 1.65m, if gift 650k and if the surving spouse lives over 7 years, not pay iht on either estate. Under current legislation. Anyone who knows different please correct.

I do not know different. But the problem with that is that there is reliance upon someone living seven years after the first death in order to not pay IHT. Without knowing the age of the parties we cannot compute that probability. I would imagine that most people are looking to take control of the situation rather than rely on the luck of longeivity.

So further affirmative steps need to be taken in order to ensure that IHT is not paid, rather than just wait, see and hope.

There are a number of methods that can be employed. The annual 3K gifts can help but won't make much of an impression on larger estates, so other strategies are needed. Probably a combination of them to be effective.

fca2019
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Re: IHT

#278681

Postby fca2019 » January 20th, 2020, 9:12 am

I made mistakes in the above post easily done as IHT overly complex!!

..this is the strategy which my relatives have been used (successfully).

Joint gifts up to 650k. On first death, estate exl gifts passes to spouse. The joint gifts 650 x 50% = 325 uses up the NRB of first person.

The remainder of estate passes free of IHT, using the spouse exemption.

The RNRB 175k passes to spouse. Assuming main residence passes to children.

On second death, NRB 325k, plus RNRB 175 plus first person RNRB 175 = 675k.

If the second person lives more than 7 years longer than the first, opportunity to gift from remaining estate. Spends and gifts to bring estate value down to 675k, assuming lives 7 years from date of gifts, then no iht on either estate.

Lootman
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Re: IHT

#278686

Postby Lootman » January 20th, 2020, 9:26 am

fca2019 wrote:Joint gifts up to 650k. On first death, estate exl gifts passes to spouse. The joint gifts 650 x 50% = 325 uses up the NRB of first person.

The remainder of estate passes free of IHT, using the spouse exemption.

The RNRB 175k passes to spouse. Assuming main residence passes to children.

On second death, NRB 325k, plus RNRB 175 plus first person RNRB 175 = 675k.

If the second person lives more than 7 years longer than the first, opportunity to gift from remaining estate. Spends and gifts to bring estate value down to 675k, assuming lives 7 years from date of gifts, then no iht on either estate.

I think that is fine as far as it goes. But from my perspective there remains three problems:

1) You rely on seven more years of life for the surviving spouse and that is not something you can control.

2) It only works up to a certain level of estate: 675K if your sums are correct. What if the OP's estate is two or three times that, or more?

3) The value of the estate itself will grow over time, unless it is 100% in cash. A million pound estate might increase by 50K or 100K a year. Far more than can normally be gifted under the rules, aside from PET's every 7 years. I actually gave up on the 3K annual gifts because it was barely scratching the surface of the problem, which was that the taxable portion of the estate was growing much faster than I could gift it away.

So it's a good start and may be sufficient for some estates, but not others.

scrumpyjack
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Re: IHT

#278696

Postby scrumpyjack » January 20th, 2020, 10:06 am

The other problem is to whom you give assets and when. Once you have given it away you have no control and your children, or grandchildren, may spend it in ways you totally disapprove of.

Also having too much money can be very bad for some people, altering their life and not for the better.

You may have some offspring who need it far more than others but children/grandchildren may resent it if they are not treated equally.

You never know what your future needs are going to be and once it has gone, it’s gone

Handing on your wealth is a minefield and it isn’t just a tax problem!

Arborbridge
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Re: IHT

#278701

Postby Arborbridge » January 20th, 2020, 10:29 am

scrumpyjack wrote:The other problem is to whom you give assets and when. Once you have given it away you have no control and your children, or grandchildren, may spend it in ways you totally disapprove of.

Also having too much money can be very bad for some people, altering their life and not for the better.

You may have some offspring who need it far more than others but children/grandchildren may resent it if they are not treated equally.

You never know what your future needs are going to be and once it has gone, it’s gone

Handing on your wealth is a minefield and it isn’t just a tax problem!



I can see this is a problem which worries some people, but not me. Do I wish to exert control over the next generation? No - it's up to them what they do and whether they act wisely. All I can do is hope give them a boost.
Neither am I concerned about whether one person "needs" it more or not: I consider it my duty to treat them equally. It's a minefield when you try to decide who is more deserving or how they arrived at their particular current position. No, just slice it up evenly between the children. Grandchildren, of course are another difficulty if one family has more of them than another, but still my inclination is to divide equally to the children, not grandchildren.

Arb.

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Re: IHT

#278702

Postby Lootman » January 20th, 2020, 10:42 am

Arborbridge wrote:
scrumpyjack wrote:The other problem is to whom you give assets and when. Once you have given it away you have no control and your children, or grandchildren, may spend it in ways you totally disapprove of.

Also having too much money can be very bad for some people, altering their life and not for the better.

You may have some offspring who need it far more than others but children/grandchildren may resent it if they are not treated equally.

You never know what your future needs are going to be and once it has gone, it’s gone

Handing on your wealth is a minefield and it isn’t just a tax problem!

I can see this is a problem which worries some people, but not me. Do I wish to exert control over the next generation? No - it's up to them what they do and whether they act wisely. All I can do is hope give them a boost.

Neither am I concerned about whether one person "needs" it more or not: I consider it my duty to treat them equally. It's a minefield when you try to decide who is more deserving or how they arrived at their particular current position. No, just slice it up evenly between the children. Grandchildren, of course are another difficulty if one family has more of them than another, but still my inclination is to divide equally to the children, not grandchildren.

In general I'd agree, but there are cases where you might want to disinherit a child.

An example may be where they have built a lot of debt irresponsibly. I would not want to reward them for that. Besides, the money would end up just going to their creditors. Particularly if they are going through bankruptcy it would be a folly to leave them money. Instead set up their share in a trust and the trustee can pay them when the bankruptcy is discharged.

Likewise if a child had married badly and there was a feeling that their wife/husband might squander it or take it in a divorce, I'd again to tempted to put their share into trust.

Of course it is against the law to totally disinherit children in some some countries, including Scotland.

But more generally yes, I think there is a broader process called estate planning. It includes IHT-mitigation for sure. But it also includes who gets what and when? And how much work and how big a mess do you want to leave for your executors? Personally I am trying to avoid IHT not least because I think it is an evil and punitive tax. But I am also seeking to simplify or avoid probate because it is such a pain to go through for those you leave behind.

Howard
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Re: IHT

#278704

Postby Howard » January 20th, 2020, 10:43 am

I am grappling with this problem. Having given away very significant amounts to children more than seven years ago and diligently completing an IHT403 annual record to show that recent gifts to children are within surplus income levels, I’d like to give something to our grandchildren when they are around 25.

It’s not really a tax issue, more a desire to pass some of my good fortune down to my descendants. I’m investigating how to give them substantial sums in the future. Talking to wealth managers they tell me it’s easy to set up a discretionary trust, but then mention offshore funds and when I look at their charges for a six figure trust, they are eye-watering over ten years. I’d rather pay more tax!

The problem with bare trusts is as Scrumpyjack has suggested, giving very large amounts to grandchildren which, in practice, they could access at 18, might not be a good idea.

I’m now back to considering asking a solicitor to set up a discretionary trust (not that expensive) and managing the investments myself (with our children as fellow trustees) using an execution-only stockbroker as the assets will probably be a well-diversified portfolio of passive investments which will (hopefully) need little attention over, say the next 10-15 years. However, I’m not sure about the complications of tax-reporting when the trust might pay out to the beneficiaries - perhaps I might not be here to worry about it!

Addressing the OP’s question, now might be the time to consider something similar? Perhaps with Uncle Philip’s wife as the person contributing the funds to the Trust assuming her life expectancy is longer?

regards

Howard

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Re: IHT

#278710

Postby PinkDalek » January 20th, 2020, 11:17 am

Returning to the OP.

UnclePhilip wrote:[Putting aside trusts for now ...

Q1: If a gift is made from jointly owned funds, can I be confident that only one of the joint givers needs to last 7 years?


In addition to the previously mentioned reading material available here and hereabouts https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm15042, you should be able to find this article by Mark McLaughlin, possibly using the header as a search term if not accessible directly:

Beware Joint Accounts and IHT: How Much is ‘Owned’ for IHT Purposes?
https://www.taxationweb.co.uk/tax-articles/inheritance-tax-iht-trusts-estates-capital-taxes/beware-joint-accounts-and-iht-how-much-is-owned-for-iht-purposes.html

It commences If two individuals hold a joint bank account, how much of the funds in that account do they ‘own’ for Inheritance Tax (IHT) purposes? The instinctive answer for many will be "50%". However, as with most tax questions the answer is not necessarily that straightforward. ...

Q2: As a significant wedge of our wealth is in ISAs, which are of necessity individually owned, is there any way that my ISA wealth can get to them without suffering IHT?


Do any of the holdings qualify for 100% IHT Business Property Relief, such as certain qualifying AIM shares?

scrumpyjack
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Re: IHT

#278731

Postby scrumpyjack » January 20th, 2020, 12:24 pm

Howard wrote:I am grappling with this problem. Having given away very significant amounts to children more than seven years ago and diligently completing an IHT403 annual record to show that recent gifts to children are within surplus income levels, I’d like to give something to our grandchildren when they are around 25.

It’s not really a tax issue, more a desire to pass some of my good fortune down to my descendants. I’m investigating how to give them substantial sums in the future. Talking to wealth managers they tell me it’s easy to set up a discretionary trust, but then mention offshore funds and when I look at their charges for a six figure trust, they are eye-watering over ten years. I’d rather pay more tax!

The problem with bare trusts is as Scrumpyjack has suggested, giving very large amounts to grandchildren which, in practice, they could access at 18, might not be a good idea.

I’m now back to considering asking a solicitor to set up a discretionary trust (not that expensive) and managing the investments myself (with our children as fellow trustees) using an execution-only stockbroker as the assets will probably be a well-diversified portfolio of passive investments which will (hopefully) need little attention over, say the next 10-15 years. However, I’m not sure about the complications of tax-reporting when the trust might pay out to the beneficiaries - perhaps I might not be here to worry about it!

Addressing the OP’s question, now might be the time to consider something similar? Perhaps with Uncle Philip’s wife as the person contributing the funds to the Trust assuming her life expectancy is longer?

regards

Howard


Yes these are all fair points. If all your family and offspring are in good health and reasonably sane, then it is easy to take the line of giving equally to give them all a start, but for many families things are not nearly so simple.

My point really is that all the IHT planning stuff one sees is all coming simply from a tax planning viewpoint. Life isn’t that simple and for families with significant problems (health and other complications) it is a mistake to let the tax tail wag the dog.

Personally I have been happy to give each grandchild a significant sum on birth in a bare trust so they should emerge debt free from Uni and able to buy a house, but not so much that they never need to work (not that I could go that far anyway!). Beyond that things are more complicated and tax is a secondary consideration.

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Re: IHT

#278732

Postby UnclePhilip » January 20th, 2020, 12:26 pm

fca2019 wrote:I made mistakes in the above post easily done as IHT overly complex!!

..this is the strategy which my relatives have been used (successfully).

Joint gifts up to 650k. On first death, estate exl gifts passes to spouse. The joint gifts 650 x 50% = 325 uses up the NRB of first person.

The remainder of estate passes free of IHT, using the spouse exemption.

The RNRB 175k passes to spouse. Assuming main residence passes to children.

On second death, NRB 325k, plus RNRB 175 plus first person RNRB 175 = 675k.


Sorry, but I don't follow this. In your example, hasn't the surviving spouse's NRB already been used in the initial 'Joint gifts up to 650K'?

If the second person lives more than 7 years longer than the first, opportunity to gift from remaining estate. Spends and gifts to bring estate value down to 675k, assuming lives 7 years from date of gifts, then no iht on either estate.


Can you explain this, I can't follow I'm afraid?

UnclePhilip
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Re: IHT

#278733

Postby UnclePhilip » January 20th, 2020, 12:29 pm

Thanks for the stimulating replies.

The £3K gifts wouldn't more than scratch the surface I'm afraid.

Although I'd been avoiding it, perhaps I/we do need to start looking at trusts

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Re: IHT

#278742

Postby Chrysalis » January 20th, 2020, 1:04 pm

scrumpyjack wrote:Personally I have been happy to give each grandchild a significant sum on birth in a bare trust so they should emerge debt free from Uni and able to buy a house, but not so much that they never need to work (not that I could go that far anyway!). Beyond that things are more complicated and tax is a secondary consideration.


I appreciate this is a personal question which you may not wish to answer, but around how much are you grandchildren likely to receive at 18? (University costs and houses being somewhat variable in terms of cost!) And have any of them reached an age where they might use the funds, or at least be aware of them? (For example knowing they have funds may influence university choices).
I’m asking because my children have also inherited a significant amount (not our choice), and we are rather feeling our way in terms of managing their understanding and knowledge, and in due course, the handover/access (at age 25) - all now becoming quite pertinent as they reach the threshold of adulthood. It would be interesting to hear any thoughts on how, and how not, to approach this.

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Re: IHT

#278748

Postby Loup321 » January 20th, 2020, 1:38 pm

I'm just replying to Chrysalis, and I know it's going off topic for the thread. The Mods will tell us to stop if it's not appropriate!

My view is to be open and honest about this sort of thing. My daughter is 8, and she knows that she will get a few thousand pounds when she is 18 that is in her JISA. It will be less than £10k, with the current plans, but still worth knowing about. There may be an inheritance, but there may not. We have a little chat about it regularly, and I tell her what I would like her to do with it, but that she is perfectly allowed to do whatever she wants with it. I think at the moment she wants to spend about £100 on chocolate (which is more chocolate than she has ever seen!) and share it with her friends, and then be sensible with the rest. Last night we had a chat, as it happens, about when she can get her own bank account with a card. I keep forgetting to give her pocket money, so having a standing order would be much more reliable. She said she would put all her money in there, but not the long term savings she has, just the Christmas money that is in her purse still (more willpower than I had at that age!). She seems to be fairly sensible with money, and I hope some of that's due to me being open and honest with her about it.

I appreciate that money coming in from outside sources, possibly with little or no time to have these discussions before the young ones get their hands on it, there is little time to tell someone what your wishes would be if you had any say in the matter. But we deal with it every Christmas and birthday, albeit on a smaller scale, and we have done so since they were able to talk and have opinions. They don't all splurge the whole lot on chocolate!

Best of luck with it all!

LouP


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