Inheritance Tax and Inflation Planning

[moorfield]

My retired (but not too elderly, yet) father in law sold his house a few years ago and downsized to a smaller house, mortgage free. As a result, he has had >£1/2 million parked in a National Savings account, being slowly eroded by inflation and on a collision course with inheritance tax. I think he largely does not need to draw on it as his pension income is quite adequate for his needs, and he has stated that it is there for his daughters' benefit if needed. I am trying to (indirectly, via Lady M) warn him of the risks that both inheritance tax and inflation pose to this pot if it is left where it is - my back of envelope calculation is that 2/3rds of it could be evaporated by inflation and ultimately tax over 15+ years - he is a head-in-sand kind of person and is unlikely to do anything with it unless prodded to, which could leave him with a nasty shock if he needs the pot later in life for care, or for his beneficiaries.

So I am looking for resources / advice / strategies that I can pass on. The key objectives being (i) how to protect his savings against/keep pace with inflation over next 10-15+ years, yet reasonably liquid and (ii) how to start minimizing the impact of inheritance tax, when it comes, now. I don't think equities would be something he is particularly interested in or needs to do now.

Any advice, gratefully received, thank you.

[JohnB]

Dad had a similar sum in a building society account (but other savings in the markets as well), and I felt he had no prospect of spending it in his 90s, but it was only when one of my nephews showed interest in buying a flat that I could persuade him to gift much of it to them. IHT is likely, but at least it stops eroding. But it needed a clear project, graphs showing how many care home years it could fund cut no ice in terms of wanting to keep it.

[Nocton]

Best to buy about 5 general investment trusts, e.g Bankers, RIT) or ETFs paying moderate dividends.
He'll be able to earn at least 2% after tax and rising with inflation. Over a few years the capital should increase too, but the main thing in retirement is to have an income rising with inflation.

[DrFfybes]

Agree about wanting income at his age would be a better 'sell' to him.

Also if IHT is going to be an issue and he is under 75, he can still contribute to a SIPP (and get tax relief) and then take the 25% if required and leave the rest outside the estate.

Paul

[Parky]

My retired (but not too elderly, yet) father in law sold his house a few years ago and downsized to a smaller house, mortgage free. As a result, he has had >£1/2 million parked in a National Savings account, being slowly eroded by inflation and on a collision course with inheritance tax. I think he largely does not need to draw on it as his pension income is quite adequate for his needs, and he has stated that it is there for his daughters' benefit if needed. I am trying to (indirectly, via Lady M) warn him of the risks that both inheritance tax and inflation pose to this pot if it is left where it is - my back of envelope calculation is that 2/3rds of it could be evaporated by inflation and ultimately tax over 15+ years - he is a head-in-sand kind of person and is unlikely to do anything with it unless prodded to, which could leave him with a nasty shock if he needs the pot later in life for care, or for his beneficiaries.

So I am looking for resources / advice / strategies that I can pass on. The key objectives being (i) how to protect his savings against/keep pace with inflation over next 10-15+ years, yet reasonably liquid and (ii) how to start minimizing the impact of inheritance tax, when it comes, now. I don't think equities would be something he is particularly interested in or needs to do now.

Any advice, gratefully received, thank you.

If indeed he does not and will not need the money I would suggest giving it away now, and then living for 7 years, thus avoiding all IHT. You do not say what will happen if his daughter does not need the money, and also hint that there may be other beneficiaries. If there are future decisions to be made on this then a discretionary trust may be worth considering. Up to the nil-rate band (£325000) can be settled in a trust every 7 years without incurring Capital Transfer Tax, after which the tax rate is 20% on assets entering the trust. For the amounts involved, the costs of a trust as a percentage need not be excessive.

[Dod101]

My retired (but not too elderly, yet) father in law sold his house a few years ago and downsized to a smaller house, mortgage free. As a result, he has had >£1/2 million parked in a National Savings account, being slowly eroded by inflation and on a collision course with inheritance tax. I think he largely does not need to draw on it as his pension income is quite adequate for his needs, and he has stated that it is there for his daughters' benefit if needed. I am trying to (indirectly, via Lady M) warn him of the risks that both inheritance tax and inflation pose to this pot if it is left where it is - my back of envelope calculation is that 2/3rds of it could be evaporated by inflation and ultimately tax over 15+ years - he is a head-in-sand kind of person and is unlikely to do anything with it unless prodded to, which could leave him with a nasty shock if he needs the pot later in life for care, or for his beneficiaries.

So I am looking for resources / advice / strategies that I can pass on. The key objectives being (i) how to protect his savings against/keep pace with inflation over next 10-15+ years, yet reasonably liquid and (ii) how to start minimizing the impact of inheritance tax, when it comes, now. I don't think equities would be something he is particularly interested in or needs to do now.

Any advice, gratefully received, thank you.

If indeed he does not and will not need the money I would suggest giving it away now, and then living for 7 years, thus avoiding all IHT. You do not say what will happen if his daughter does not need the money, and also hint that there may be other beneficiaries. If there are future decisions to be made on this then a discretionary trust may be worth considering. Up to the nil-rate band (£325000) can be settled in a trust every 7 years without incurring Capital Transfer Tax, after which the tax rate is 20% on assets entering the trust. For the amounts involved, the costs of a trust as a percentage need not be excessive.

Personally I would avoid any kind of Trust if possible, There are costs involved and also of course hassle. The OP may be seen I suppose to have a vested interest as the daughter will be his Lady M but assuming that that can be overcome, I would suggest keeping say 2 years or so of costs for care when the time comes, if it comes, and invest that in two or three wealth preserving trusts, such as Capital Gearing and Personal Assets Trust. The balance could be earmarked for giving away now to who ever he likes, either a favourite charity or three, and/or the beneficiaries of his Will. As has been said, if he then lives for 7 years that will fall outside of the IHT net, but in any case the liability to IHT will fall as time passes.

If he refuses to contemplate giving away anything at present, then in the absence of index linked National Savings Certs, put all or most of it into the above wealth preserving ITs.

Dod

[Charlottesquare]

Not much but a little in a portfolio of AIM shares might assist.
There are also some forestry products out there but no liquidity re these, so again a small amount.
Family helping run a FHL for him could give him an income and future BPR but qualifying rules tough, especially days available days let and active participation, in addition not liquid.

Have you considered what the IHT bill currently would be given the £325, maybe a spouse's £325 and maybe two RNRBs at £175k each might mitigate matters partly?

[Kantwebefriends]

If he refuses to contemplate giving away anything at present, then in the absence of index linked National Savings Certs, put all or most of it into the above wealth preserving ITs.

Dod

(Beware, amateur speaking here.)

Index Linked National Savings Certs are an almost ideal asset for a discretionary trust. No taxable income, no taxable capital gains: if a trust contained only ILSCs (plus a little bit of cash, perhaps, that might be lent to beneficiaries until it's needed), the hassle and running cost for the trust would be about zero. The trust deed would have to give the trustees the express power to invest without diversification.

If the beneficiaries would expect to invest in shares, ISAs, pensions, housing, and so forth, spare cash could be gifted directly to them. It would be possible to buy Life Insurance against the risk of dying within seven years, with the payout in trust for the children.

[Dod101]

Yes. I have about 10% of my invested assets in Index Linked N S Certificates which of course date back a long way. (*They have not been sold to new customers for some years.) It is amazing how they nominally mount up. I just leave them to mature and then roll them forward. I have extracted money from them every few years to buy a new car, and the capital value is still a bit more than my original investment. Now of course with inflation as it is, I will see a big increase in the nominal value. The trouble is that IHT relief does not follow these inflation proofed levels.

Dod

[moorfield]

Thanks all for comments here.

[helfordpirate]

Index Linked National Savings Certs are an almost ideal asset for a discretionary trust.

.. except NS&I will not allow ILS to be held by trustees without a specific named beneficiary - presumably for money-laundering reasons. So a true discretionary trust where the trustees have power to appoint to any of a class of beneficiaries (who may not even exist yet e.g. future grandchildren) could not hold them AFAIK.

[Kantwebefriends]

Index Linked National Savings Certs are an almost ideal asset for a discretionary trust.

.. except NS&I will not allow ILS to be held by trustees without a specific named beneficiary - presumably for money-laundering reasons. So a true discretionary trust where the trustees have power to appoint to any of a class of beneficiaries (who may not even exist yet e.g. future grandchildren) could not hold them AFAIK.

My experience is the opposite. When a discretionary trust was set up by a family will about twenty years ago it did invest in ILSCs. Have the rules changed since then? Shouldn't ns&i have raised objections with the trustees? As far as I know ns&i still allows maturing certificates to be rolled over.

[mutantpoodle]

YES..

index bonds can be held in trusts...
but te key is

with a specific named beneficiary

[Kantwebefriends]

YES..

index bonds can be held in trusts...
but te key is

with a specific named beneficiary

Does that mean that the trustees of a discretionary trust must set up life interests for each beneficiary and assign the certificates to them? But many trusts have beneficiaries who are not yet born.


It might be wiser if I simply asked you whether you can point me to some links to read

[mutantpoodle]

in fact I was specifically replying to the point others made that ILBS put in trust, must have a specific beneficiary

I have no experience of buying them for 'un named' beneficiaries
apologies I was not clearer

[yorkshirelad1]

If he refuses to contemplate giving away anything at present, then in the absence of index linked National Savings Certs, put all or most of it into the above wealth preserving ITs.

Dod

(Beware, amateur speaking here.)

Index Linked National Savings Certs are an almost ideal asset for a discretionary trust. No taxable income, no taxable capital gains: if a trust contained only ILSCs (plus a little bit of cash, perhaps, that might be lent to beneficiaries until it's needed), the hassle and running cost for the trust would be about zero. The trust deed would have to give the trustees the express power to invest without diversification.

If the beneficiaries would expect to invest in shares, ISAs, pensions, housing, and so forth, spare cash could be gifted directly to them. It would be possible to buy Life Insurance against the risk of dying within seven years, with the payout in trust for the children.

• As others have said, ILSC are no longer on sale for new purchase, they are only available to holders of existing maturing ILSCs.
• Also (IANAL), ILSC inside a trust would be taxed like any other asset in a trust, and might possibly therefore not be "tax free", but this was information I received several years ago, so may be out of date and may vary with the type of trust. Also be aware of HMRC's trust reporting requirements that come into effect on 1 sept 2022 (see e.g. https://www.gov.uk/government/publications/hm-revenue-and-customs-trusts-and-estates-newsletters/hmrc-trusts-and-estates-newsletter-april-2022)

[Adamski]

It's his money to do with what he wants. So 'advice' might not be well received. As said a Head in the sand person. Like a lot of us are.

Have you and wife have something specific that can go toward? Moving house, school fees, repay mortgage? Then ask if wants a contribution. That might be a gentler strategy.

[Clitheroekid]

My retired (but not too elderly, yet) father in law sold his house a few years ago and downsized to a smaller house, mortgage free. As a result, he has had >£1/2 million parked in a National Savings account, being slowly eroded by inflation and on a collision course with inheritance tax.

Bear in mind that the residence nil rate band can still be used in the case of downsizing.

[Kantwebefriends]

in fact I was specifically replying to the point others made that ILBS put in trust, must have a specific beneficiary

I have no experience of buying them for 'un named' beneficiaries
apologies I was not clearer

Thanks for the clarification.