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ISAs and IHT

Practical Issues
redsturgeon
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Re: ISAs and IHT

#400237

Postby redsturgeon » March 30th, 2021, 6:26 am

Moderator Message:
This board is for practical tax issues not for discussing the relative merits of fairness of taxes. Please keep on topic

Bouleversee
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Re: ISAs and IHT

#402704

Postby Bouleversee » April 8th, 2021, 6:48 pm

Dod101 wrote:There certainly is not a great benefit in not drawing on ISAs. I take most of the dividends out each year and nowadays pay very little income tax indeed. I have occasionally extracted capital but not very often.

As for making them IHT free I doubt that that will ever come about. The only reason that a SIPP is free of IHT is not because some chancellor decided that that would be a good idea, but simply that, the way our pensions are organised, they are held by pension trustees and are therefore not part of our estates. On the general subject of IHT, the regime is complicated but really quite generous, now that we can use a deceased spouses unused allowances and the main residence allowance.

Dod


My husband's will left the exempt allowance to the children as it was made before it could be retained till the 2nd death and the main residence allowance is clawed back on estates over £2m (not difficult if you have a house in SE England) so my estate won't benefit from either. I have given money to children and grandchildren over the years to help with house purchase and school fees but with an unexpectedly reduced horizon myself now I cannot see any way out of my estate being subject to a large chunk of IHT. I wanted to give more while my husband was alive but he was always worried about the costs of nursing care for both of us and the rising cost of living versus a fixed rate annuity (following the Equitable Life debacle), so ISAs continued to build up. Short of spending vast sums on high living which I never seem to have time, opportunity or desire to do (who wants solitary holidays even when Covid permits?), I can't see any way of avoiding a large amount of IHT and if I pop my clogs tomorrow my heirs will have to cough up tax on some of the money gifted previously, which I find annoying as they really needed it, especially one family; being self-employed in the travel trade is not the best business to be in when Covid strikes!

I don't follow your comment about SIPPS. My children's SIPPS (what little there is in them) are in accounts with ii as are their ISAs. What is the essential difference? They still have to (mis)manage them themselves. The tax relief on the ISA is of no benefit if you don't draw the money out (which we didn't) but the SIPPs do get tax relief on the way in and can avoid IHT on the way out. I don't think we managed things very well. If only one had a crystal ball and if only we'd spent more money instead of working our guts out and economising to save for the benefit of the taxman. Lootman has the right idea but he is still quite young; I have left it far too late. Now that the infection rate has reduced, however, and I've had both my jabs, I intend to have a shot at getting some decent help in the garden (very difficult and very expensive in this area) and likewise the house, both of which require a lot of work and expenditure. I won't hesitate to spend capital if it comes to that though I doubt if I shall find the time and energy to do all that much. However, I shall start with replacing the Microwave which caught fire yesterday (which reminds me I really must find time to set up a new house and contents insurance policy) and my range gas cooker which no longer self-ignites. I'd like an electric one if they come in that size but there is no electric cooker point. And so the days rush past.

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Re: ISAs and IHT

#402722

Postby GrahamPlatt » April 8th, 2021, 7:45 pm

“intend to have a shot at getting some decent help in the garden (very difficult and very expensive in this area)”

Then get your under-employed relatives in and pay top whack.

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Re: ISAs and IHT

#402723

Postby Dod101 » April 8th, 2021, 7:46 pm

Well I can only answer your point on SIPPs. Otherwise I understand the points you make but have no solutions other than as you say, spend capital if you need to. We are only here once (as far as I know)

As for SIPPs, mostly, anyway (and if in doubt ask II) the legal owner is a SIPP Trustee and in your case and mine (mine is also held by II) the legal owner is II or some wholly owned subsidiary of II. They have discretion as to whom the benefits will be paid when we pop our clogs. It is not like an ISA where the legal owner is II but we are the beneficial owners. A SIPP is organised under pension legislation. Pensions like a SIPP (a self invested personal pension, the clue is in the name) are held by pension trustees. The assets in the pension are therefore outside of our estate for IHT which is why we provide the pension trustees with a declaration of our wishes.

It can be passed on to others intact without any IHT being payable.

HTA

Dod

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Re: ISAs and IHT

#402732

Postby scrumpyjack » April 8th, 2021, 8:17 pm

Boulversee, you may be able to give additional amounts to your family, which may be exempt from IHT and would not be subject to the 'out of income' exemption, if the amounts qualify as Family Maintenance.

Here is an article on it
https://allanjanes.com/-Reducing-your-I ... of-Capital

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Re: ISAs and IHT

#402734

Postby Lootman » April 8th, 2021, 8:28 pm

scrumpyjack wrote:Boulversee, you may be able to give additional amounts to your family, which may be exempt from IHT and would not be subject to the 'out of income' exemption, if the amounts qualify as Family Maintenance.

Here is an article on it
https://allanjanes.com/-Reducing-your-I ... of-Capital

From your article:

Usually, if you give away capital in excess of your personal allowance, then that gift is referred to by HMRC as a ‘transfer of value’. Depending on the recipient, that transfer may incur an immediate charge to IHT, or it may incur a potential charge to IHT if you die within 7, and in certain circumstances 14, years of making the gift.

Do you happen to know under what circumstances such a gift could be subject to an immediate charge? What category of recipient would that apply to?

I have always taken the view that gifts are non-reportable at the time. And so a fortiori not taxable at the time either.

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Re: ISAs and IHT

#402737

Postby Bouleversee » April 8th, 2021, 8:37 pm

GrahamPlatt wrote:“intend to have a shot at getting some decent help in the garden (very difficult and very expensive in this area)”

Then get your under-employed relatives in and pay top whack.


I didn't say they were under-employed, both working very hard. One reasonably well paid but never enough, the other not being paid by most of his overseas clients because all the hotels/villas are closed (and/or political issues intervene) and he is self-employed. He is still promoting them to the UK travel trade in the hope of bookings resuming at some point. He had not long started on his own so income not brillant even before Covid. He does help in the garden sometimes and I do pay him over the odds in relation to his competence in that context but he also has a reasonably large garden of his own to maintain and doesn't live on the doorstep.

He took time off to drive me some distance for a hospital appointment this morning at short notice when he had other plans connected with work.
Having just had most of the daffodil flowers in my front garden pinched off in their prime by a 19 yr old lad at Uni who begged me for work (I had asked him to pinch off some dead flower heads while he was on the beds digging out a weed which is prolific this year and he didn't get the roots of those either) I would really like some professional help but I doubt I will find any. Off topic so end of story.

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Re: ISAs and IHT

#402741

Postby scrumpyjack » April 8th, 2021, 8:48 pm

Lootman wrote:
scrumpyjack wrote:Boulversee, you may be able to give additional amounts to your family, which may be exempt from IHT and would not be subject to the 'out of income' exemption, if the amounts qualify as Family Maintenance.

Here is an article on it
https://allanjanes.com/-Reducing-your-I ... of-Capital

From your article:

Usually, if you give away capital in excess of your personal allowance, then that gift is referred to by HMRC as a ‘transfer of value’. Depending on the recipient, that transfer may incur an immediate charge to IHT, or it may incur a potential charge to IHT if you die within 7, and in certain circumstances 14, years of making the gift.

Do you happen to know under what circumstances such a gift could be subject to an immediate charge? What category of recipient would that apply to?

I have always taken the view that gifts are non-reportable at the time. And so a fortiori not taxable at the time either.


I think it is only reportable in certain circumstances such as gifting to a Trust and perhaps to someone not domiciled in the UK. Normal gifts to UK resident individuals are not AFAIAW reportable at the time of giving but are a matter for your executors if you die within 7 years.

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Re: ISAs and IHT

#402744

Postby Lootman » April 8th, 2021, 9:06 pm

scrumpyjack wrote:
Lootman wrote:From your article:

Usually, if you give away capital in excess of your personal allowance, then that gift is referred to by HMRC as a ‘transfer of value’. Depending on the recipient, that transfer may incur an immediate charge to IHT, or it may incur a potential charge to IHT if you die within 7, and in certain circumstances 14, years of making the gift.

Do you happen to know under what circumstances such a gift could be subject to an immediate charge? What category of recipient would that apply to?

I have always taken the view that gifts are non-reportable at the time. And so a fortiori not taxable at the time either.

I think it is only reportable in certain circumstances such as gifting to a Trust and perhaps to someone not domiciled in the UK. Normal gifts to UK resident individuals are not AFAIAW reportable at the time of giving but are a matter for your executors if you die within 7 years.

OK, thanks. I can understand that when contributing to a Trust.

And I guess to recipients who live overseas since HMRC would struggle to collect any IHT from people beyond UK jurisdiction who received PETs and then the UK donor did not live 7 more years. Seems a bit unfair if the deceased did live 7 more years though.

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Re: ISAs and IHT

#402766

Postby Bouleversee » April 8th, 2021, 10:48 pm

scrumpyjack wrote:Boulversee, you may be able to give additional amounts to your family, which may be exempt from IHT and would not be subject to the 'out of income' exemption, if the amounts qualify as Family Maintenance.

Here is an article on it
https://allanjanes.com/-Reducing-your-I ... of-Capital


Thanks, Scrumpy, but I don't think they fit the bill.

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Re: ISAs and IHT

#402767

Postby Bouleversee » April 8th, 2021, 10:51 pm

Lootman wrote:
scrumpyjack wrote:Boulversee, you may be able to give additional amounts to your family, which may be exempt from IHT and would not be subject to the 'out of income' exemption, if the amounts qualify as Family Maintenance.

Here is an article on it
https://allanjanes.com/-Reducing-your-I ... of-Capital

From your article:

Usually, if you give away capital in excess of your personal allowance, then that gift is referred to by HMRC as a ‘transfer of value’. Depending on the recipient, that transfer may incur an immediate charge to IHT, or it may incur a potential charge to IHT if you die within 7, and in certain circumstances 14, years of making the gift.

Do you happen to know under what circumstances such a gift could be subject to an immediate charge? What category of recipient would that apply to?

I have always taken the view that gifts are non-reportable at the time. And so a fortiori not taxable at the time either.


So have I. PETs in fact.

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Re: ISAs and IHT

#402777

Postby PinkDalek » April 8th, 2021, 11:16 pm

IHTM04067 - Lifetime transfers: what is an immediately chargeable transfer?

Transfers which are not potentially exempt transfers (IHTM04057) are immediately chargeable (IHTM04067).


https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04067

Examples are then provided.

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Re: ISAs and IHT

#402845

Postby yorkshirelad1 » April 9th, 2021, 10:50 am

Adding some (general) thoughts on making tax efficient gifts (with regard to IHT) (SIpps have a slightly different regime)

  • survive 7 years from the date of the gift as a Potentially Exempt Transfer, (PET) which IIRC has to be a gift without reservation i.e. you can't say what they do with it
  • use a trust (but these days they're taxed to the hilt and can cost quite a lot in professional fees so the sums involved need to be signficiant to make it worthwhile)
  • it's worth considering the exemption criteria for gifting within 7 years of death: it should be regular, out of income, and make no change to your standard of living
  • to claim exemptions on gifts for IHT purposes may require a fair bit of footwork and admin by your exors and some fairly good knowledge of the deceased's affairs (see for example the "Gifts made as part of normal expenditure out of income" of IHT403); so keep good documentation, and keep things simple; the rules are quite tricky to get your head round.
  • bear in mind that the PET regime regularly gets rumoured that it's for the chop*.

The above is not exhaustive, IANAL, just an observer, and a user (I did the gifting pages of IHT403 for my Mum's estate).

*: FT 13 Feb 2021
Should I give away my assets before the Budget?
https://www.ft.com/content/b2e3ae41-69fb-458d-9b5c-0ea2a1c8ea78
(the FT has a paywall, but you should be able to get to the article via a link in Google:
https://www.google.co.uk/search?q=site%3Aft.com+give+away+assets+before+the+budget&oq=site%3Aft.com+give+away+assets+before+the+budget

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Re: ISAs and IHT

#402937

Postby Lootman » April 9th, 2021, 4:16 pm

PinkDalek wrote:IHTM04067 - Lifetime transfers: what is an immediately chargeable transfer?

Transfers which are not potentially exempt transfers (IHTM04057) are immediately chargeable (IHTM04067).


https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm04067

Examples are then provided.

From my reading of that it would appear that a gift to a non-UK person is not "an immediately chargeable transfer". I believe Scrumpyjack had suggested it might be.

It does raise the interesting issue of someone gifting their entire net worth to an overseas person and then promptly dying. Assuming those assets left the UK in the process, it would present a challenge for HMRC to collect the IHT now due from the overseas gift recipient.

yorkshirelad1 wrote:survive 7 years from the date of the gift as a Potentially Exempt Transfer, (PET) which IIRC has to be a gift without reservation i.e. you can't say what they do with it

To be a little pedantic the issue is not so much that you can't tell the recipient what to do with the gift. But rather that you cannot personally benefit from what is done with it without risking losing the PET status. Or at least risk delaying the start of the seven year count until the benefit ceases.

So I could make a gift to my child and say "you should buy a house with it". That would be fine as long as I did not then live in that house, or collect rent from it etc. And of course there would be no way I could compel him to buy a house so the idea is really just a suggestion or recommendation.

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Re: ISAs and IHT

#402968

Postby PinkDalek » April 9th, 2021, 6:07 pm

Lootman wrote:To be a little pedantic the issue is not so much that you can't tell the recipient what to do with the gift. But rather that you cannot personally benefit from what is done with it without risking losing the PET status. Or at least risk delaying the start of the seven year count until the benefit ceases.

So I could make a gift to my child and say "you should buy a house with it". That would be fine as long as I did not then live in that house, or collect rent from it etc. And of course there would be no way I could compel him to buy a house so the idea is really just a suggestion or recommendation.


We were historically legally advised that no comments at all should be made either orally (noting your say) or in writing as to the reason for or suggestions as to the use such a gift, other than, maybe, including out of love and affection etc.

I have a template letter, used a number of times over the past 25 years or so, which passed muster on a fairly recent Executorship, with a new set of lawyers, where I included words including "outright gift and is for you to deal with as you so wish"" in the narrative but I no longer use that part. Those letters, signed by both parties, were immediately handed to the solicitor then acting for their files and they kindly returned Certified copies for ours. Those Certified copies were accepted by the new solicitors when the time came (the change in solicitors was due to a retirement).

Not saying your version (if in writing) won't be okay - merely that we were instructed not to include such matters by a very well known firm at the time, who were advising on our Family's IHT Estate Planning generally.

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Re: ISAs and IHT

#402981

Postby Lootman » April 9th, 2021, 6:35 pm

PinkDalek wrote:
Lootman wrote:To be a little pedantic the issue is not so much that you can't tell the recipient what to do with the gift. But rather that you cannot personally benefit from what is done with it without risking losing the PET status. Or at least risk delaying the start of the seven year count until the benefit ceases.

So I could make a gift to my child and say "you should buy a house with it". That would be fine as long as I did not then live in that house, or collect rent from it etc. And of course there would be no way I could compel him to buy a house so the idea is really just a suggestion or recommendation.


We were historically legally advised that no comments at all should be made either orally (noting your say) or in writing as to the reason for or suggestions as to the use such a gift, other than, maybe, including out of love and affection etc.

I have a template letter, used a number of times over the past 25 years or so, which passed muster on a fairly recent Executorship, with a new set of lawyers, where I included words including "outright gift and is for you to deal with as you so wish"" in the narrative but I no longer use that part. Those letters, signed by both parties, were immediately handed to the solicitor then acting for their files and they kindly returned Certified copies for ours. Those Certified copies were accepted by the new solicitors when the time came (the change in solicitors was due to a retirement).

Not saying your version (if in writing) won't be okay - merely that we were instructed not to include such matters by a very well known firm at the time, who were advising on our Family's IHT Estate Planning generally.

That is interesting. I guess it can never hurt to avoid saying anything along with the gift, especially in writing. Or better yet, to employ the specific wording that you were advised.

But if that is 100% the case then I imagine it would invalidate a lot of PETs that people thought were valid. For instance around 5/6 years ago I gave both my sons six-figure sums to enable them to buy their first homes. The fact that the money had a specific intent was not something that I ever considered might invalidate those transfers as potentially being exempt from IHT after 7 years. My reasoning would be that I derived no benefit from their purchases, other then some pleasure at seeing them get on the property ladder and gaining some residential security and control. There must be many cases like that.

I would certainly like to think that that feeling of pleasure alone does not jeopardise the potential IHT saving. I might ask my accountant when we next speak. There was nothing in writing.

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Re: ISAs and IHT

#402996

Postby scrumpyjack » April 9th, 2021, 7:44 pm

Although not strictly necessary, I have always used a reputable firm of solicitors to deal with the IHT forms, their submission to the revenue and the application for probate. Having done all the paperwork and handing it to them 'on a plate' and then managed myself dealing with the estate administration. The result was that in no case has the revenue ever queried the IHT returns and has granted probate without any queries. These were all estates with large IHT bills. This approach kept legal fees to a very low level.

If the Revenue are dealing with a reputable firm of solicitors who have submitted the return with all the information clearly set out and explanations for anything unusual, they are unlikely to start detailed enquiries.

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Re: ISAs and IHT

#402998

Postby PinkDalek » April 9th, 2021, 7:49 pm

I didn’t mean to imply anything would be invalidated. Only that, for whatever reason, best not to write anything much at all. Btw, the originally used wording was mine but, after 25 years or so, I can’t recall if I made it up or borrowed parts from a text book.

Maybe some write something along the lines of “Here’s a substantial sum for your house purchase and we can’t wait to stay there with you during the holidays and at weekends. Plus your offer of the Granny flat for us to stay in when working nearby is much appreciated.”. I haven’t looked up the criteria btw, merely musing (and maybe getting mixed up with the Pre Owned Asset regime anyway).

Incidentally, not sure if it has been mentioned but isn’t the full wording to be wary of “Gifts with reservation of benefit”? The last couple of words being important. Not usually applicable to cash gifts, unless there’s some dodgy suggestions by the donor, such as make sure you gift me the interest.

Random article re houses:

https://www.kingsleynapley.co.uk/insights/blogs/private-client-law-blog/inheritance-tax-why-do-so-many-fall-into-the-gift-with-reservation-of-benefit-trap

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Re: ISAs and IHT

#402999

Postby Dod101 » April 9th, 2021, 7:50 pm

I think we are all getting a bit pedantic. As long as their is no condition attached to the gift (as in, I attach a cheque for £100,000 but it is given to you for the express purpose of buying a property) That I suspect is a gift with reservations and would not pass muster.

If on the other hand you say,'I attach a cheque for £100,000. I would prefer that you use it as a deposit for that house you mentioned but it is of course up to you what you do with it.' I think that would be fine.

The other extreme is of course to say 'As I am now getting on a bit and you are just beginning to make your way in the world, I am attaching a cheque for £100,000 to help you on your way. Please use it as you see fit' That is clearly fine.

And I agree with scrumpyjack. And I thought the wording was 'Gifts with Reservation'

Dod

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Re: ISAs and IHT

#403005

Postby Lootman » April 9th, 2021, 8:24 pm

Dod101 wrote:I think we are all getting a bit pedantic. As long as their is no condition attached to the gift (as in, I attach a cheque for £100,000 but it is given to you for the express purpose of buying a property) That I suspect is a gift with reservations and would not pass muster.

If on the other hand you say,'I attach a cheque for £100,000. I would prefer that you use it as a deposit for that house you mentioned but it is of course up to you what you do with it.' I think that would be fine.

The other extreme is of course to say 'As I am now getting on a bit and you are just beginning to make your way in the world, I am attaching a cheque for £100,000 to help you on your way. Please use it as you see fit' That is clearly fine.

In the case of my kids, their mortgage lender required a letter from me stating (something like) "This transfer is an unconditional gift made for the purpose of purchasing a property".

So even if there is nothing else in writing, there is likely to be that documented statement that could be looked at.

All that said, it seems the main problem arises when parents donate their own home to their kids and then keep living there. As long as it is a cash gift used to buy another property or asset, and you derive no benefit from that asset, then I would have to believe that it works as a PET under current rules.


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