Advice - Minimising IHT

[cleanpairofheels]

Would appreciate comments on my strategy to minimise IHT.
Recently retired from work as company director, having sold business. Aged 65, married with 3 children in their twenties who are the 3 beneficiaries in our wills. No mortgage. Have built up SIPP steadily over last few years to benefit from tax benefits. Financial summary as follows:
- Main house £450k
- Holiday home £450k
- ISAs for self and wife £340k
- Misc savings accounts £350k ISAs include high yield shares plus various bonds.
- Pension pot £1.15mm (Have IP 2016 to this value. Couldn’t get FP2016 as was still paying into pension. Doh!)

IHT Status:
Together assets add to £1.6mm for self and wife. Deducting £1.0mm for 2020 allowance gives a potential IHT exposure of £240k, provided rules don't change again.

Strategy
1) Continuing to enjoy life as much as possible with travel, social, etc.
2) Gifting funds (PETs) each year to children out of normal income.
3) Do not intend to crystallise SIPP (£450k) in order to keep out of estate unless need funds for care.

Note that recently carried out retrospective review of PETs to children to be able to demonstrate amounts were within normal expenditure. Compiled detailed spreadsheet complying with gov requirements. (IHTM14231). With hindsight should have done this a lot earlier as took almost a week of effort. Note that most of gifts were made over 7 years ago, so hopefully there’s not much potential liability should wife and I get hit by a bus next week.

Have crystallised 4 DB pensions that produce £40k gross income per year, which is more than ample. At 66% LTA, though as mentioned above don’t intend to crystallise SIPP so not planning to exceed LTA (IP2016 of £1.15mm).

Specific questions:
- Considered getting life insurance for say £100k. Have estimate of £125 per month for joint policy with wife. Do people feel this is beneficial?
- Considered buying £100k of AIM stocks. Optimus ISA seems the most likely platform for this though high dealing costs (2%). Or should I just buy individual AIM shares provided meet criterion. Understand just need to hold for 2 years before exempt from IHT. Any thoughts?
- Are there any other suggestions for mitigating IHT?

[Loup321]

I'm only commenting on your question about life insurance. I don't know about any of the other points you make.

What would be the purpose of the life insurance? You have plenty of assets to give to your grown up children, and have no dependents. The purpose of life insurance is to pay for something that you are no longer able to earn the money to pay, so funding the bringing up of children or paying the mortgage. You have plenty of assets to pay for funeral costs that are easily liquidated when the time comes. I expect that you have it set up that if one of you were to die the other still has a healthy income from pensions. If you don't, you probably should look into whether that can be rectified.

1. I don't think you need life insurance.
2. If you decide that you do, I think that two separate policies give a greater cost/return benefit. Joint policies usually only pay out on the first death.

[scotia]

You clearly have already thought this through quite deeply - so I can give you no serious advice apart from saying that I have enjoyed investing modest quantities of funds in the AIM market, as part of my IHT minimisation strategy. Sometimes with spectacular success, sometimes with a disastrous failure, but on average these have done well. My only concern at the moment is that AIM shares may be getting into bubble territory - possibly boosted by investors looking to minimise IHT.

[stewamax]

Three points:
- are your 3 children all domiciled in the UK and likely to remain so? If not beware of dual-taxation on gifts and on inheritance - there may or may not be dual-taxation agreements available, depending on where they live.

- when you make gifts to them - whether 'out of income' or PETs - it might be worth using two bank accounts, with the out-of-income gifts made from your normal current account and the latter made from a PET account. At least it would show to HMRC that you are clearly differentiating between the two. I quote from IHTM14250 "If a gift is made out of a current account you only need to check that the gift could have been made out of income. You do not need to match the gift to specific money in the account."
My (limited) understanding is that gifts from normal income that do not reduce your standard of living are classified differently from PETs by HMRC but have to pass some tests, the main one being that the gift does not come out of the donor's capital. So ring-fencing your normal income might prevent future arguments with HMRC.

- you didn't mention whether your various investments are held in the name of you, your wife or jointly. If you were the main breadwinner I assume you are already using nil-gain-nil-loss inter-spouse transfers to minimise tax, but you may also need to consider who is likely to die first. Again, using as mixture of your sole account, your wife's sole account, and a joint account might be worthwhile when one of you dies and the outstanding liability for tax on PETs needs working out. This is a murky area!

[genou]

- Considered getting life insurance for say £100k. Have estimate of £125 per month for joint policy with wife. Do people feel this is beneficial?

I think an earlier post missed the point that this would be in trust, and hence outside your estate, to pay any IHT. The premia will themselves be PETs. You might need to get advice on this one, to have the numbers crunched properly It will only turn out to be worth doing if it still in place when you ( or more likely the latter of you both ) die . But that would mean that as you get older it is going to cost a lot more than 125/month to maintain the cover. You need to get a handle on how much more, and have a think about your and your spouse's likely life spans.

[syrio]

If you want to minimise it give as much as possible to your children now and live another 7 years.

You and your wife keep

£650k IHT nil rate (2 * £325k)
Main house - up to £500k allowance for the main house (allowance is phased in over the next few years)
the pensions

Regular gifts to your children from income are of course a good idea.

I don't think the life insurance is very beneficial, it will get more and more costly as you age.

There are options such as AIM shares and EIS's, and even trusts, but I don't think they are particularly attractive for various reasons - complexity, performance, costs. You should also consider simplifying your investments as you age, as your mental capacity is quite likely to decline.

You could always spend some of it on things you will enjoy.

Also if one of you dies first are your children inheriting money - probably not the best choice as it uses up nil rate band. Better, to transfer the nil rate band to the remaining partner who makes a gift to the children which will then be exempt if they live another 7 years.

[UnclePhilip]

Not sure enough about your circumstances, but in a broadly similar range to you, and am exploring 'Loan Trusts'. While not taking current assets out of IHT, they appear to take subsequent growth out. So, depending on life expectancy, may be useful....

[Chrysalis]

Hi
Apologies for not answering your specific questions, but I just wanted to check that you are aware that your SIPP will be tested against the life time allowance when you reach 75, irrespective of whether you take benefits from it?

Regarding IHT. You seem to be going about it all pretty sensibly, thinking through what your needs might be and what you can comfortably give away. Beyond that, I’d be wary of investing in assets or schemes for the sole purpose of IHT mitigation - you might end up with investments that aren’t suitable, or you’re not comfortable with. It’s not the end of the world to die with an IHT liability. I guess one purpose of taking out life insurance might be to ensure the tax bill is covered, as it has to be paid before probate is granted and if much of your wealth is illiquid this might pose an issue for your heirs.

One other point not yet mentioned is that I understand that making charitable donations greater than a certain percentage of your estate reduces the IHT rate. Worth checking out?

Also, it may be worth thinking through other aspects of estate and old age planning - thinking about who you might trust to help manage your affairs when you can’t, making sure all records are straight and your wife knows how to access and manage your accounts and investments.

[Chrysalis]

Just to clarify - I meant making bequests to charity in your will, if that wasn’t clear.

[supremetwo]

One other point not yet mentioned is that I understand that making charitable donations greater than a certain percentage of your estate reduces the IHT rate. Worth checking out?

Which could cost you at probate as, unless it's a fixed amount, the charity solicitors will query the value of everything to extract the maximum possible for the charity.

And as your wealth changes, your Will might need frequent changes to ensure that a fixed bequest to a charity follows this HMRC percentage rule.

[Wmnr]

Have a look at Discounted Gift Trusts. They are not for everyone but provide an instant reduction in iht liability (amount depends on age) and after 7 years the full amount should be exempt whilst providing some income

I currently use life insurance to cover iht liability but I'm much younger so it's much cheaper.

[syrio]

I would like to correct my earlier post - allowance for the main house was wrong - its not £500k, its 2 * (£500k - £325k) = £350k for a couple.

You and your wife keep

£650k IHT nil rate (2 * £325k)
Main house - up to £350k (2 * £175k) allowance for the main house (allowance is phased in over the next few years)
the pensions

Note that the allowance for the main house starts getting reduced if you have an estate worth more than £2m

[JohnB]

Do your children earn well, are they sensible, do they own property or plan to in the short term? If they aren't homeowners or high tax payers, why not give them a third share each in the holiday home, so they get the CGT exemption, can't easily sell up and waste the money etc. When family members use the home they could pay them rent, which might be outside the IHT gift rules.

TBH I might just give them large slugs of money now anyway. If you are in good health (you didn't say) their chances of being caught on gifts now are slim

[mutantpoodle]

I may be misunderstanding your post...but
under strategy '2'

you say PETS...out of income

gifts out of income are acceptable and are NOT .........PETS
though you may have to prove if asked
however if they really 'out of income' this would be no problem

a PET that requires you to live 7 years (reducing) is not required to be 'out of income

[Dod101]

Do your children earn well, are they sensible, do they own property or plan to in the short term? If they aren't homeowners or high tax payers, why not give them a third share each in the holiday home, so they get the CGT exemption, can't easily sell up and waste the money etc. When family members use the home they could pay them rent, which might be outside the IHT gift rules.

TBH I might just give them large slugs of money now anyway. If you are in good health (you didn't say) their chances of being caught on gifts now are slim

That seems to me to be about the most sensible advice so far. It surely does not matter to you who owns the holiday home as long as you have the use of it when you want and so passing it on to the next generation might make sense unless of course the children would prefer the cash in which case give them a slug of cash now. Looks as if you and your wife have more than sufficient to live a comfortable life.

Although it is a personal matter, I have no problem with my estate paying some IHT and with the built in allowances nowadays IHT liability is much reduced anyway.

Dod

[cleanpairofheels]

A big thanks for of your comments as they have been very useful. In terms of my initial thoughts as follows:

Buying AIM shares: Understand risky but I believe it will useful investigating a few key shares
Location children: 2 are in UK but 1 just moved to NZ. So good point there may be additional tax considerations.
Investments/ available cash: Good point that my wife has most of the cash as I was a 40% tax payer. I shall move some funds into my account.
Family knowledge of estate: I have summarised gift status in a portfolio for each of the children and they have a copy of our wills. One of children has taken an interest on the financial side and I am getting them updated on our details so they know where to find things.
Life Insurance to cover part IHT liability: I’m still not convinced
SIPP: This was the major one for me as I was unaware it would be tested against LTA at 75. I took financial advice on this one and they didn’t mention this! Not sure if it changes anything now, but it certainly raises my awareness depending on when guidelines invariably change.
Loan Trusts: I shall investigate
Discounted Gift Trusts: I shall investigate
Charitable donations: I shall investigate
Give more money to children now: Have thought about this but will reconsider. (Our health is in good shape)
Give children share of Holiday home: Had thought about this but children rejected idea as one is about to buy own place, and another is in NZ and wanted independence. Note that they all work and are pretty trustworthy/ sensible.

I thought it useful to add my thoughts on IHT which I should have done earlier. Have worked a lifetime growing my company with major sacrifices in family etc. Feel only now are we reaping the reward and I wanted to ensure all options were considered so I could maximise wealth passed onto children. Once again I thank all of the posters that have helped me achieve that.

[Dod101]

The OP might be interested in an article in the IC today re 'The tax benefits of giving to charity'. As someone said if you leave at least 10% of your net estate to charity not only do you pay no IHT on that but the balance of the estate is liable for IHT at only 36% not 40%. I am contriving to do this myself but could not remember the exact numbers. Better that than buy AIM shares just for the sake of saving IHT I think. The other point is that you should not leave the residue to charity but a fixed amount because otherwise the charity may want to see the entire estate account to make sure they are getting their proper due. That of course means having to keep an eye on the numbers to make sure they keep to at least 10% of the net figure, although I will give to charity anyway.

Dod

[syrio]

Re leaving to charity, it does reduce the rate at which you pay tax, but it doesn't mean that you can leave more money to your heirs.

Just pointing it out, because I get the feeling that this is commonly misunderstood.

[PinkDalek]

Re leaving to charity, it does reduce the rate at which you pay tax, but it doesn't mean that you can leave more money to your heirs.

Just pointing it out, because I get the feeling that this is commonly misunderstood.

Have a look at these examples which explain what might happen where, rather than a charitable bequest of 7%, the 10% threshold is used:

https://www.mishcon.com/assets/managed/ ... ersion.pdf [pdf]

It concludes:

Even more striking is the fact that the larger £100,000 gift to charity also increases the amount going to the children compared to the second scenario, when £70,000 went to charity.

[syrio]

have a look at these examples which explain what might happen where, rather than a charitable bequest of 7%, the 10% threshold is used:

I had a look, it illustrates my point perfectly. Leaving money to charity means that there is less money going to your heirs.

Scenario 1: No gift to charity. Amount passing to children £600k
Scenario 2: 7% gift to charity. Amount passing to children £558k
Scenario 3: 10% gift to charity. Amount passing to children £576k