IHT

[scrumpyjack]

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.

They are only 0 to 5 so have no idea at present about money and no knowledge that they have anything coming their way. I gave them each about £225k so the dividends on that will accumulate within the tax free personal allowance. I have no idea what that will be when they are 18 or what its purchasing power will be. It is possible some of the income might be spent for their benefit whilst still minors. Nevertheless I would hope it would be enough for them to leave Uni with no debts and to at least have the cash for a house deposit, possibly buy outright if the investments do well.

Whilst they will be entitled at 18 to do what they want, one only has to transfer the assets into their name if they insist and we have found that children don't generally go that far or splurge the money at 18. Generally bare trusts have worked better in our family than discretionary or other trusts and are much simpler and more tax efficient. Being aware at 18, but not in actual control, and receiving income whilst at Uni is good for gradually introducing them to financial issues.

[Chrysalis]

Thanks for the response. Yes, I agree that most children/young people won’t go mad or off the rails if entrusted with a sum which has a clear use and intention.
Ours are now aware, but won’t gain full control until age 25. Not coming from a particularly well off family myself, I do find it a bit difficult to imagine how we will manage that transition. My family culture has always been very much against gifts with strings, or trying to use money to control behaviour or actions, and I’ve been trusted outright with small but helpful amounts during my earlier adulthood, and indeed as a teenager. So I will try to behave similarly, but the amounts are an order of magnitude larger, and I can sense that letting go control is not necessarily going to be easy! Especially if they want access for reasons I’m not fully convinced by. The last thing I want is for it to be a source of conflict.

[PinkDalek]

Again, getting back to the OP's position.

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'?

fca2019 may well respond in due course but I think what is being described is the hope the surviving spouse survives 7 years from the Joint gifts up to 650k, so until then they are potentially exempt transfers and haven't used that person's NRB.

It is also assumed that the other spouse dies within the 7 years and thus uses the NRB in full.

I'm unclear what that achieves, other than using up the £325,000, which is available anyway and could potentially be transferred to the surviving spouse if the first spouse's NRB is not used up or partially used by dispositions to anyone other than the surviving spouse. Maybe even effectively at a larger amount if the NRB is ever increased. Perhaps the hope is both survive the 7 years.

[Dod101]

Thanks for the response. Yes, I agree that most children/young people won’t go mad or off the rails if entrusted with a sum which has a clear use and intention.
Ours are now aware, but won’t gain full control until age 25. Not coming from a particularly well off family myself, I do find it a bit difficult to imagine how we will manage that transition. My family culture has always been very much against gifts with strings, or trying to use money to control behaviour or actions, and I’ve been trusted outright with small but helpful amounts during my earlier adulthood, and indeed as a teenager. So I will try to behave similarly, but the amounts are an order of magnitude larger, and I can sense that letting go control is not necessarily going to be easy! Especially if they want access for reasons I’m not fully convinced by. The last thing I want is for it to be a source of conflict.

You said that your children had inherited a significant amount and added '(not our choice)'. That implies that it may have come from a grandparent without conditions as to its use. You therefore surely have no standing in the matter other than possibly as a trustee until the funds are to be handed over at age 25. There is therefore no transition to be managed. Clearly you can offer some guidance but the beneficiary certainly does not have to take any notice of it.

Dod

[Howard]

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.

Attempting to give an answer to your question, and now having read Scrumpyjack's response: my problem is that two of my grandchildren aged around 11 are already more sensible about money than one of my children! I'm contemplating amounts per grandchild which with likely capital growth would be tens of thousands in today's terms. And maybe a lot more in 10 years' time. Looking back, I'm not sure that at 18 it would have been good for me to have had access to a bare trust containing that much money. Maybe better to be offered a larger amount (given investment growth) at around age 25 to put down on a house or invest in a small business, with guidance from the trust's trustees.

A side benefit, possibly relevant to Uncle Philip's original question, is that one's children, if co-trustees, are inevitably involved in the management of the trust and its assets and thereby gain some investment education.

regards

Howard

[scrumpyjack]

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.

Attempting to give an answer to your question, but I'd be very interested in Scrumpyjack's response: my problem is that two of my grandchildren aged around 11 are already more sensible about money than one of my children! I'm contemplating amounts per grandchild which with likely capital growth would be tens of thousands in today's terms. And maybe a lot more in 10 years' time. Looking back, I'm not sure that at 18 it would have been good for me to have had access to a bare trust containing that much money. Maybe better to be offered a larger amount (given investment growth) at around age 25 to put down on a house or invest in a small business, with guidance from the trust's trustees.

A side benefit, possibly relevant to Uncle Philip's original question, is that one's children, if co-trustees, are inevitably involved in the management of the trust and its assets and thereby gain some investment education.

regards

Howard

If they are sensible at 11, they are likely to be sensible at 18 IMO. Are they likely to be any more sensible at 25? The few instances in my experience where the young person has gone off the rails, it has happened in their late twenties, in spite of having had the money at 18, so I'm not convinced there is much to be gained by that. I have known cases where the male children had control at 18 but the females had to wait until 30. Now that really did cause problems!! I do prefer bare trusts but forgetting to transfer assets into their name for a few years after they reach 18. Obviously they can stamp their feet and insist but that hasn't happened in my experience (yet!). Also you should be the bare trustee yourself, not the child's parent, particularly if there's any doubt of their financial reliability.

[Lootman]

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

Yes, the rather paultry amounts allowed for gifts do not effectively mitigate much IHT. If you want to make IHT go away then you need more aggressive tactics.

The good news is that IHT is commonly referred to as a "voluntary" tax, which hints at the idea that with planning it can be avoided. It's really a matter of how determined you are to avoid it, and how much risk and uncertainty you are willing to live with, as every mitigation tactic comes with a catch.

For example PD already mentioned BPR-qualifying AIM shares, which can be held in an ISA as well as a taxable account. They do the job and you only have to wait 2 years rather than 7 for exemption. But they are more volatile and so you'd need an array of them - I have about 20 and have already seen one total loss, although three of them have tripled in value as well.

Of course, the BPR rules could change in the future as could any of the IHT rules and exemptions. But you can only work with how things are at the moment.

Trusts are one way as noted, but I have no experience of them and so will defer to others.

Gifts up to the 325K limit every seven years are well known, but that is a hope-based approach and may fail you.

Charitable donations are exempted and I know that personally I'd rather direct my excess wealth to a cause that is meaningful to me than have the government spray it around in welfare or some such.

And of course you can reverse the good habits of a lifetime and actually extravagantly spend it down on the people and things you care about. If done correctly that doesn't count as declarable gifts.

There are more drastic solutions like marrying your beneficiary (if legal) or emigrating, but I'll assume that is a step too far.

[scrumpyjack]

Yes of course the other BPR route is to buy loads of farmland. I gather Dyson now owns more than the Queen! Though he has now also fled abroad to the Far East

[Dod101]

And of course on the charitable donations front, if you donate at least 10% of your taxable estate to charities, the taxable bit is only taxed at 36% rather than 40%. I am doing that but if you are close to the 10% minimum you need to keep an eye on the value of your estate.

IHT has got ever more complicated but nowadays, there are a lot of ways to reduce the IHT liability (which have been discussed on this thread) and personally I have no problem with paying some IHT and I do not think that my heirs will be unduly concerned. I am paying very little income tax at the moment whilst I am alive and enjoying my assets, so it is not unreasonable to pay something into the pot in the most painless way once I am gone.

Dod

[JohnB]

I got my grandfather's inheritance (about a year's pay) in trust until 18. 25 would be too late. Of course I'm sensible and bought a unit trust a month before a market crash! Skipping generations makes a lot of sense, provided your grandchildren are evenly scattered. The modern SIPP exclusion to IHT is an obvious way to ensure sensible behaviour, as they can't spend it until they are 55+ ...

I don't like the IHT exemption for SIPPs on principle, but its worth considering. Its also likely to be withdrawn with the stoke of a pen.

[Dod101]

I don't like the IHT exemption for SIPPs on principle, but its worth considering. Its also likely to be withdrawn with the stoke of a pen.

The fact is of course that SIPP's are not an IHT exemption; it just happens that they do not form part of the owner's estate and thus by definition are not charged IHT. Look upon them like any other pension assets such as a personal pension arrangement or for that matter the assets backing a defined benefits pension. Neither of these forms part of an individual's estate either.

Dod

[JohnB]

They seem very different to me, as DB and annuity schemes stop at death (except for partner benefits, which ditto), while oddly SIPPs, a savings scheme with tax benefits to help with retirement continue after you have retired to the choir eternal. George Osborne only made the change in 2014, and it must have hit IHT revenues hard, so I can see why it could be reversed by a future chancellor.

What with the house IHT allowance, 2 people with identical lifetime earning profiles could pay very different levels of tax at death purely based on their investment choices (or of state/private employer) 20 years before, which seems perverse to me

[Lootman]

They seem very different to me, as DB and annuity schemes stop at death (except for partner benefits, which ditto), while oddly SIPPs, a savings scheme with tax benefits to help with retirement continue after you have retired to the choir eternal. George Osborne only made the change in 2014, and it must have hit IHT revenues hard, so I can see why it could be reversed by a future chancellor.

What with the house IHT allowance, 2 people with identical lifetime earning profiles could pay very different levels of tax at death purely based on their investment choices (or of state/private employer) 20 years before, which seems perverse to me

But that comes right back to the distinction I drew upthread. Investments that come with restrictions, limits and conditions may enjoy tax benefits that more liquid assets do not.

So for example with any kind of pension fund your money is locked away, perhaps for decades, whilst the government of the day can endlessly tinker with it, and typically do.

Whereas hard cold cash or taxable securities, which enjoy no tax benefits, can be whisked away and out of the country in a minute, never to be taxed again.

Pensions, houses and ISAs are UK-bound and therefore subject to future taxation risk. They are captive and held hostage. You were seduced by the lenient tax treatment. Other assets which are ostensibly taxed less, can be spirited away and so are arguably more valuable.

[JohnB]

Isn't spiriting away like that illegal? And hard to do nowadays without clever schemes that equally hold you hostage.

If you are prepared to do that, IHT in any form is optional

[Lootman]

Isn't spiriting away like that illegal? And hard to do nowadays without clever schemes that equally hold you hostage.

If you are prepared to do that, IHT in any form is optional

Moving capital overseas is 100% legal. There were exchange controls before Thatcher but not since. Even Corbyn was not publicly seeking to change that.

I was not talking about offshore "schemes". Merely the fact that you can move your assets and yourself overseas right now and never worry about UK tax again. Something that cannot be said about things like SIPPs, which is why they carry tax benefits. They need them to entice you.

A general rule is that the more tax advantages something has, the more catches there are to it, and the more locked in you are.

[JohnB]

Er, if you are UK domiciled, aren't you liable for all income tax on foreign income and IHT on the assets? I suppose you could always move to a country with no IHT, there are a dozen or so

[ursaminortaur]

I got my grandfather's inheritance (about a year's pay) in trust until 18. 25 would be too late. Of course I'm sensible and bought a unit trust a month before a market crash! Skipping generations makes a lot of sense, provided your grandchildren are evenly scattered. The modern SIPP exclusion to IHT is an obvious way to ensure sensible behaviour, as they can't spend it until they are 55+ ...

I don't like the IHT exemption for SIPPs on principle, but its worth considering. Its also likely to be withdrawn with the stoke of a pen.

My understanding is that beneficiaries can access an inherited SIPP via drawdown or as a lump sum before they are 55.

See

https://forums.moneysavingexpert.com/showthread.php?t=5553092

"Can I just clarify something? The options that have been mentioned above seem to be (a) transfer it to a pension for the beneficiary(s); or (b) pay it to them subject to tax. What if the beneficiaries are below the age at which they could access funds in a pension and the funds are significantly more than you would want to have taxed in one tax year?
Eg you pop your clogs when your kids are early 50s, leaving a £400k SIPP to split between them. Is there a way they could use it to retire before the normal pension access date by drawing a taxable income each year from it until they are old enough to access their own pension funds, but avoiding paying the HRT that would be due if they drew it all at once?
Originally posted by Triumph13 ”

They don't have to be over 55 to drawdown on it, they can be any age. If the deceased was over 75 they will be taxed on what they drawdown when they draw it at their marginal rate. If the deceased was under 75 it's all tax free.

[Dod101]

They seem very different to me, as DB and annuity schemes stop at death (except for partner benefits, which ditto), while oddly SIPPs, a savings scheme with tax benefits to help with retirement continue after you have retired to the choir eternal. George Osborne only made the change in 2014, and it must have hit IHT revenues hard, so I can see why it could be reversed by a future chancellor.

What with the house IHT allowance, 2 people with identical lifetime earning profiles could pay very different levels of tax at death purely based on their investment choices (or of state/private employer) 20 years before, which seems perverse to me

I do not think that George Osborne changed the SIPP rules as far as IHT is concerned. He certainly changed the rules about what happens or can happen to them on death of the original owner but all governments have been mucking around with SIPPs since they were invented and can certainly change them again.

I do not disagree with your final paragraph though. The whole IHT rules need a thorough overhaul.

Dod

[Lootman]

Er, if you are UK domiciled, aren't you liable for all income tax on foreign income and IHT on the assets? I suppose you could always move to a country with no IHT, there are a dozen or so

Not to take us too far off-topic, but you are taxed on non-UK income only if you are UK-resident for that tax year. Domicile doesn't have anything to do with that.

Domicile is harder to lose than residency, and does theoretically mean that you retain a liability for UK IHT. Although in practice if you, your assets, your death and your probate are all overseas, collection of any UK IHT would be somewhere between unlikely and impossible. It is also unlikely that a foreign executor would notify the British authorities of your death. Nor could he/she be penalised for that omission due to a lack of jurisdiction.

And if it was a country with its own IHT then that would take precedence. Also note that some countries tax the beneficiaries rather than the estate.

[scrumpyjack]

Er, if you are UK domiciled, aren't you liable for all income tax on foreign income and IHT on the assets? I suppose you could always move to a country with no IHT, there are a dozen or so

Not to take us too far off-topic, but you are taxed on non-UK income only if you are UK-resident for that tax year. Domicile doesn't have anything to do with that.

Domicile is harder to lose than residency, and does theoretically mean that you retain a liability for UK IHT. Although in practice if you, your assets, your death and your probate are all overseas, collection of any UK IHT would be somewhere between unlikely and impossible. It is also unlikely that a foreign executor would notify the British authorities of your death. Nor could he/she be penalised for that omission due to a lack of jurisdiction.

And if it was a country with its own IHT then that would take precedence. Also note that some countries tax the beneficiaries rather than the estate.

Has this scenario ever been tested? I understand that HMRC can recover IHT from the beneficiaries where the estate does not pay it, so you would have to have only beneficiaries who are non UK resident (and non UK domiciled?) as well as an Executor who was prepared to risk being personally pursued by the UK authorities. The UK authorities would know of the death unless you ceased claiming the state pension before death or your estate continued receiving it after death, which in itself would be an offence of some sort?