“A voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.”
– Roy Jenkins
The previous article I wrote on inheritance tax was my most commented on yet. Inheritance tax (IHT) must be really popular!
So let’s have some more…
Do you remember our fictional friends Sarah and Stephen from that last post?
Just like them I’ve found myself quietly panicking about my family’s potential inheritance tax exposure, spurred on by the looming inclusion of residual pension assets in the inheritance tax net.
I’ve long grasped the basics of inheritance tax planning:
- Potentially Exempt Transfers (PETs), aka ‘the seven-year rule’
- The joys of ‘regular gifts from surplus income’
- How ISA wrappers pass (somewhat) intact to your spouse
- The intricate (read: maddening) dance between IHT and capital gains tax (CGT)
But I’d never really sat down to think about how all these rules and exemptions might interact in… creative ways.
So today I’ll share a few thoughts, opportunities, and useful discoveries.
As ever, I’m writing about these inheritance tax hacks partly in the hope that even more interesting wrinkles will surface with your comments.
Don’t be shy if you know something we could all benefit from.
Keeping it in the family
This post is something of a sequel to the adventures of Sarah and Stephen in the mysterious realm of pension pots and inheritance tax.
Because today we turn our attention to Sarah’s parents: Mike and Mary.
After a few light edits to their circumstances – artistic licence, your Honour – this aging couple provide the perfect case study for some inheritance tax mischief.
For the sake of simplicity, we’re going to assume that Mike and Mary are in their 80s.
There’s a fair bit of uncertainty around whether either of them will live another seven years – the magic number for IHT gifts to fully escape the clutches of HMRC.
Mary is younger, and in better health. She is still able to complete a full Waitrose shop without a lie-down in the car park.
Mike… not so much. Let’s just say he’s the likelier candidate for an ‘estate-triggering event’.
We’ll also assume that, once pensions are dragged into the IHT net from 2027, their combined assets are comfortably north of £2.35 million. This means they won’t benefit from the residence nil-rate band, which starts tapering away at £2 million and disappears entirely at £2.35 million.
We’re also going to steer clear of business reliefs and agricultural land. I’m already going stir up enough vitriol as it is!
Get professional advice: Tax law is famously voluminous and everyone’s circumstances are different. These ideas are just to get you thinking. They may not work for you. Pay for the advice of specialists as and when you need it.
Potentially Exempt Transfers
You probably know the drill: if you give something away and go on to live for seven years, there’s no IHT to pay.
Hence ‘potentially’ exempt.
If you die sooner, the gift may still be exempt if it falls within your nil-rate band (£325,000). Or it may be subject to tapered IHT if you make it past the three-year mark.
Here’s the detail that gets interesting: There are no tax consequences for gifts between spouses. So in a married couple, who gives the gift actually matters.
Let’s say Mike and Mary want to give £1m to their daughter, Sarah. Most of that money is technically Mike’s. He could just write the cheque. But Mike is older, male, and has a bunch of ailments that mean he’s statistically less likely to make it seven years than Mary is.
So instead, Mike gives £325,000 to Sarah (within his nil-rate band), and the remaining £675,000 to Mary – his spouse. No IHT or CGT involved there. (Okay, technically, he can give Sarah £328,000 because there’s also a £3,000 per year ‘annual allowance’ as well. Whatever.)
Then Mary gives that £675,000 to Sarah as a PET.
This way we’re only betting on Mary living seven more years, which – barring errant buses – seems significantly more likely. The £675,000 is out of the estate if she makes it. The £325,000 was already within Mike’s allowance.
Voilà! Same gift, less tax risk.
The snag? A need to have some grown-up conversations about relative life expectancy.
Capital gains tax
The PET rules are all well and good if you’re gifting cash. But if you’re handing over assets – like a second home or shares – then CGT rears its awkward head.
Let’s suppose Mary owns a London flat, worth £1.2m, which she inherited from her father in 1999 at a probate value of £200,000. She’s had it ever since, let out through an agent, and now hates everything about it except the capital gain.
Mary would love to just give the thing to Sarah. But gifting the property is a ‘deemed disposal’ for CGT purposes. So she would be liable for CGT on the full gain:
- £1.2m – £200,000 = £1m gain → CGT at 24% = £240,000
Mary finds it absolutely ridiculous that she’d have to pay nearly quarter of a million of CGT to give a pokey little flat that was her dad’s to her daughter. But here we are.
She could sell it first, pay the CGT, then gift the proceeds. But that’s still £240,000 in tax.
Worse, if she gives it to Sarah and then dies shortly afterwards, Sarah is whacked with a 40% IHT charge on the whole property, too. That’s another £480,000. Total tax: £720,000 on a £1.2m asset – a 60% effective rate. Ouch!
Now here’s the thing. If Mary simply leaves the property in her estate, CGT is wiped at death. IHT will still apply, but CGT won’t.
That’s arguably better. But of course, you can’t sell a house to pay care home fees if you’re dead.
(There are occasionally rumours that the current government might change this to make both CGT and IHT payable on death – because they consider dying to be a naughty way of avoiding CGT).
The spousal CGT reset trick
Here’s a clever one I hadn’t clocked until recently.
Say Mike is likely to predecease Mary (because… well, let’s just say he’s not outliving anyone at this point).
Mary could gift the house to Mike – as a spousal gift, so no CGT arises. Mike then holds the asset, with the original £200,000 base cost.
Then Mike dies, leaving the house to Mary in his will. Again, no IHT because it’s spouse-to-spouse.
But here’s the trick: Mary’s CGT base now resets to the probate value on Mike’s death – let’s say £1.2m.
Mary can now sell the house immediately for £1.2m. No CGT, no IHT, full liquidity.
She can then PET the £1.2m cash to Sarah and, if she lives another seven years, the entire value is out of the estate. And all tax-free.
That’s £720,000 in potential tax saved, simply by playing a bit of last-minute spousal ping-pong with the property title.
Morbid? A little.
Effective? Very.
Regular gifts from surplus income
This is the closest we get to an IHT cheat code.
If you make regular gifts from your surplus income, and it doesn’t impact your standard of living, those gifts are completely exempt from IHT – immediately. No need to survive seven years.
There are three tests:
- The gifts must be part of your normal expenditure
- They must be made out of income (not capital)
- You must have enough income left to maintain your standard of living
Let’s take Mike. He has a £100,000 pension income – split roughly half from a DB scheme and half from SIPP drawdown. Post-tax, he nets about £70,000. His ISA is worth £1m and yields 2%, so that’s another £20,000 of untaxed income.
Total income: £90,000 post-tax.
Mike spends around £50,000 a year. So that’s £40,000 surplus. He could reasonably start a standing order to Sarah for, say, £2,500 per month – £30,000 per year – and claim that it’s regular expenditure out of surplus income.
Provided it’s well-documented, that’s fully exempt.
But what if Mike wants to ramp it up?
Well, Mike could reallocate his ISA into higher-yielding assets. For instance, the iShares GBP Ultrashort Bond UCITS ETF (ticker: ERNS) yields around 5%, which would give £50,000 of income on a £1m ISA.
Now he’s looking at £120,000 post-tax income, £50,000 expenses – so £70,000 surplus.
Maybe bump Sarah’s monthly gift up to £5,000?
Or if he gets adventurous – say, loading the ISA with infrastructure trusts yielding 10% – that’s £100,000 income from the ISA. Add in the £70,000 pension income, and we’re now at £170,000 total income with £120,000 ‘surplus’.
£10,000 a month to Sarah? Quite possibly justifiable.
Or how about this?
What if Mike allocates all £1m in his ISA to the IncomeShares Coinbase (COIN) Options ETP?
It’s quite likely that the vast majority of Mike’s million pounds will then be thrown off as income in the next 12 months (along with, in all likelihood, a 100% capital loss). He could be giving Sarah £100,000 a month of surplus ‘income’.
I couldn’t possibly comment on either the merits of such an investment, or whether HMRC might take the line that this is a blatant attempt to artificially turn capital into income. You’ve been warned!
Again, seek professional advice. (And remember that tax planning mistakes can be ruinous.)
Executors versus beneficiaries
A quick but vital point: executors are on the hook for sorting out the estate, filing the tax forms, and paying any IHT before distributing assets.
They’re personally liable for underpaid tax if HMRC comes knocking after the estate is distributed – and they can’t recover the shortfall from the beneficiaries.
If Mike names his cautious solicitor as executor, and said solicitor is asked to sign-off on the £1m ‘normal expenditure out of surplus income’ claim above… well, you can guess how that goes. The claim doesn’t get made, and the tax gets paid.
But what if Sarah is both executor and sole beneficiary? She ticks the box – believing in good faith that her dad thought call-over-write ETFs on super volatile stocks were an excellent investment – makes the claim, and takes her chances.
Worst case, HMRC disagrees later and she pays. But she’s kept control of the process and potentially saved six-figures in IHT.
If your executors are the same people who are inheriting, then they have the same incentives.
Before we leave ISAs behind
Another quick couple of reminders on ISAs:
- ISAs are inheritable by your spouse, and they can keep the tax wrapper intact. Technically they get a one-off ‘additional permitted subscription’ (APS) allowance equal to the value of your ISA when you die, allowing them to reconstitute it in their name. I hear that the APS process is far less bureaucratic if you and your spouse use the same platform for your ISAs. Worth aligning now to avoid form-filling grief later.
- The ISA wrapper doesn’t die when you do — not straight away, at least. It hangs around as a so-called continuing ISA for up to three years or until the assets are distributed, whichever comes first. During that time, all income and capital gains remain tax-free. So if you inherit £1m of ISA investments, pulling the assets out immediately could expose you to income tax and CGT. But leave them in the wrapper and they can quietly grow, untaxed. The trick is this only really works if the estate stays in administration — something far easier to arrange if you’re both the executor and the sole beneficiary. (Another tick in the ‘advantages of being an only child’ column.) Say the portfolio returns 15% over that period, and your marginal tax rate is 40% — that’s £60,000 of tax you’ve sidestepped. Not bad for doing nothing, slowly.
Final thoughts
That’s probably enough for one post – and we haven’t even got into the complicated stuff like trusts. Let’s save that for another day.
If you’ve got other strategies, horror stories, or offbeat ideas, please do drop them in the comments.
Again – as always this is not personal advice. It’s not even pseudo-advice! I’m just a bloke on the internet.
For further reading, I highly recommend Your Last Gift: Getting Your Affairs in Order by Matthew Hudson. It’s a surprisingly readable guide to getting your financial afterlife in shape.
Maybe give a copy to your parents? At a tactful moment.
Follow Finumus on Bluesky (not that he ever posts there) or X. Also read his other articles for Monevator.
Great stuff, loved reading every bit of it.
I would be interested if you have any hacks for single people
of which I am one but, my options seem very limited
and I don’t like the idea of money disappearing in IHT and CGT
When considering gifts from income, does anyone have any idea if HMRC will consider the Excess Reportable Income on accumulation units as income?
Thank you, very interesting.
One thing is puzzling me – in the example in Regular gifts from surplus income – if Mike is taking that much income from his pensions then he’s paying 40% income tax on a chunk of it – the same rate he’d pay in IHT. What am I missing?
If Mike is “confident” his longevity is short, then he could also juice his SIPP drawdown. Perhaps draw 2o% of the capital each year – my understanding is this will still be treated as income to him as it will indeed be exposed to income tax of 40% perhaps 45% on the way out of the SIPP. Sure a lot of tax but as he will die over 75 the SIPP pot remaining would be taxed for IHT and then drawdowns at Sarah’s marginal rate – so a saving.
@PC – On Mike withdrawing from his pension and paying 40% tax. He is expecting to die on the 6th of April, 2027. So his pension will be liable for IHT anyway, and then the beneficiaries will have to pay income tax _as well_ to get it out. So by withdrawing it and gifting it, he’s saving one layer of tax.
Any idea how HMRC view drawing down a DC pot and then giving it away.
Gifts from excess income and therefore exempt or running down capital and therefore liable?
For example say £400,000 DC pot.
Take £40,000 as income every year and pay 20% income tax on it. Gift the net £32,000 away as excess income as it isn’t needed due to living expenses / standard of living being met by ~£10k state pension.
Say after 10 years that’s £320,000 gifted away out of excess drawdown income, but the capital in the DC pot has been reduced to zero (ignoring any returns).
Gift from drawdown income? or Gift from DC pot capital?
https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14231
KISS – Annuity / Life Insurance COMBO
– annuitise assets > £1m IHT threshold
– joint annuity @ 6%+, paid until second death
– gift surplus income
– buy Life Ins for assets annuitised, premium approx 1%*
– Life Ins written in trust paid tax free to beneficiary
* subject to age / health etc
Potentially zero IHT payable
My wife asked – does putting the BTL solely in the “sickest” person’s name risk more of the asset to care costs?
As it happens we have 3 BTLs and none are in joint names – so hopefully some CGT savings! I’m conflicted with mixed emotions…..
Thanks for the post, Finumus.
(i) When you come to discuss trusts could you please tell us what you make of “reversionary trusts”? A late friend – much richer than us – rejected the idea of them fearful of their complication. Was she being wise or foolish? Have they been tested in court (England and Wales)?
(ii) Surplus income: can anyone confirm that pension income includes the tax-free lump sum bit as well as the taxable bit?
(iii) My widow’s estate is unlikely to exceed £2 million – except (a) who knows how high asset price inflation might get? and (b) she may have many years of inflation ahead, her parents having died at an average age of 95.
So I thought that perhaps I should leave £175k of my share of the house to the younger generation rather than my widow, thus reducing somewhat the danger of her estate reaching £2 million. It would be up to her whether she’d have more peace of mind if she bought that part of the house back from its new owners.
Likewise I’d leave any of my undrawn SIPP to the (relative) youngsters rather than Herself. I’m torn: I’ve always been keen to do as much as poss to give her security and comfort in old age but I hate the idea of the oppressive marginal tax rates that could be due on her death.
@Finimus:
Nice post.
We last discussed gifts from regular income at: https://monevator.com/pensions-and-inheritance-tax-rugged-by-reeves/
and there were several open items, including SIPP income. I assume this current post is what you mentioned at #112 in your earlier @M post?
I note you say above that Mikes initial scenario (provided it is properly documented*) is fully legit. Have you been advised on this point and what about if Mike had, say, only a DC pension? Also, would the state pension help?
FWIW, I see the whole “gifts from excess income “area as very subjective/woolly, although I think the intent is clear (I refer to this as the “thrust of the exemption” at #T103 in your earlier post), and AIUI it is [currently] rarely used. Were it to become popular IMO it would almost certainly be removed in due course – bit like the old SIPP IHT wheeze.
*several folks recommend a letter describing the intent could be useful and that a recurring pattern of gifting over several years is also required
Here’s an idea I had – inspired (probably) by Mark Meldon, whose posts on Monevator I thought excellent.
Sell some low-yielding assets and use the loot to let my wife buy a Purchased Life Annuity on my (my!) life. While I survived she’d receive an income that gets favourable tax treatment and would not push her into higher rate income tax. The part of the annuity that HMRC views as taxable income would pay tax at 20% and the other 80% could be given away as surplus income.
Whereas the part of the annuity that HMRC views as return of capital could be accumulated to generate more income in whatever way is tax-efficient – regular saver bank accounts, ISAs, what have you. Any suggestions, chaps? Or just treat it as capital and gift it to The Young at an annual (£3000 + n x £250) x 2.
It may be that the idea is a bit far-fetched and that it would be better simply to hold high-yielding assets in ISAs. On the other hand the annuity is essentially longevity insurance – if I outlive my prognosis from the NHS we could do pretty well out of it.
@dearieme
In reference to your point ii, I have it on good authority from large pension providers that the pension tax-free cash can be included in the “normal expenditure out of income” IHT exemption. This was discussed across various webinars for my job since the Budget, and one of these big providers had actually checked this with HMRC.
This is alongside the caveat that the tax-free cash must itself be a regular income out of the pension, and then regularly gifted over at least 3 to 4 years. Meaning the full 25% couldn’t be drawn as a one-off lump sum and then regularly gift it, because it would be classed as being out of capital.
Also noting that “regular” gifts do not have to be the same amount each time or frequency over the years to qualify under this IHT exemption. Bit of a weird quirk. But then the person drawing more income than they actually need could choose to use it to go on a holiday on a whim one month, instead of gifting it to the kids 😀
Very useful post.
@Al Cam @7. “We last discussed gifts from regular income at: https://monevator.com/pensions-and-inheritance-tax-rugged-by-reeves/
and there were several open items, including SIPP income.”
This guidance from HMRC defines what counts as income: https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14250
It states: “It is usually clear whether payments received are income in nature. Common sources of income are employment and self-employment, rents from property, pensions, interest and dividends”
It explicitly mentions pensions as income. Am I missing something?
@jp – On the Annuitize / Life Insurance Combo. I will be running the numbers on this strategy at some point. The challenges seem to be: you have to pay income tax on some fraction if the annuity income, effectively at your highest marginal rate (because it’s presumably additive to whatever other income you have). Whilst Term life insurance is cheap (although I just had considerable difficulty getting some, because of medical history)… at some point you’re going to die. And life ASSURANCE is not cheap, for obvious reasons. Even in your example 6% annuity / 1% insurance – you’re paying 17% of the pre-tax annuity income for your insurance – so it doesn’t come for free.
Finally: The bit that is not taxed (return of capital) is NOT regarded as income from which one can make IHT free “surplus” gifts: ‘The capital element of a purchased life annuity within the meaning of ITTOIA 2005/S423 purchased on or after 13 November 1974 is not regarded as part of the transferor’s income for the purposes of the exemption in accordance with IHTA84/S21(3).’ Source: IHTM14250
@Al Cam – Yes – this is the post with the Surplus Income Hack (sorry it took so long).
@Blott: “My wife asked – does putting the BTL solely in the “sickest” person’s name risk more of the asset to care costs?” I don’t know. The world I’m writing about here it is assumed that everyone will have to pay their own care costs (or at least their, partner, family, whatever, will have to pay them) – so this is a separate question which is sort of outside the scope of my interest. (I would say “expertise”, but I have none).
@Barnowl #13:
See e.g. #6 above or #98 at earlier post.
@Al Cam #17
Thanks for those references. The question boils down to whether drawdown from a Self Invested Pension Plan counts as pension income. The guidance I referred to says it’s usually obvious what counts as income. I would be staggered if SIPP drawdown does not count as income.
@Barn Owl (#18):
@Finimus draws out some SIPP drawdown examples above that IMO would probably not qualify. FWIW, I speculated in the older post that the rules may well date from before the widespread use of DC pensions. That is, when pension income was mostly from DB schemes – which you cannot run down and are just nothing like as flexible as DC schemes.
As I mentioned above, IMO “gifts from [surplus] regular income” is messy (esp. wrt DC schemes) and if it were to be [widely] exploited then it would probably just be closed down by HMG.
Just my opinions/thoughts though!
Nice couple of articles.
Presumably maxing out the cash m/c everyday, and giving the bundles of cash to loved-ones is not very traceable?
(another reason not to lose cash…)
@Planalyst and others: how does “surplus income” work for a married couple?
Our own finances are integrated: in economic terms only an arbitrary answer can be given to the question “Which of you pays the Council Tax bill?” Does HMRC look at the matter in accounting terms?
Should we disentangle, with some bills being paid from my current account, some from hers, some from a joint account, according to whatever looks advantageous in this context?
@ dearieme #9
Re your question about Reversionary Trusts… I’m guessing you mean Flexible Reversionary Trusts FRTs?
They can be a good solution, but there are always things to be aware of.
These include how they are established (must be through an IFA – no self-serve option that I’m aware of), administration (trust reporting), costs (initial and ongoing) and ‘unknown unknowns’ re how these products might be treated in the future.
There are not many providers, but Canada Life is one. (Declaration – I don’t, and have never had, any affiliation).
Search: Wealth Preservation Account
An FRT involves two trusts.
A Bare Trust then a Discretionary Trust.
You gift money into trust – and you must survive 7 years for this to be fully outside of your estate.
The gift is a Chargeable Lifetime Transfer (CLT). If under your nil rate band of £325k there is nothing to pay to HMRC at the outset. If more than that (or other CLTs have taken place in the previous seven years), then there will be a CLT liability payable to HMRC immediately on establishment. Note that there may also be 10-year periodic charges and exit charges.
There is a good 3-minute Canada Life video of how such a product works and the way money can move out of an estate for IHT purposes, whilst still giving the Settlor access to money (usually, under a Discretionary trust, the Settlor no longer has access).
https://www.canadalife.co.uk/estate-planning/wealth-preservation-account/
Note 1 – if funds are accessed via maturing segments, these count towards the 5% tax deferred allowance.
This is return of capital – NOT income, so can’t be used as a basis for ‘normal expenditure out of income’ gifting.
Note 2 – these products can be administratively heavy – you must report these trusts to the Trust Registration Service within 90 days of establishment.
Note 3 – these are not cheap products – there are multiple layers of charges.
You will need to go through an IFA to establish an FRT. They will want their cut! 1.5% to 3% of the amount you are gifting into trust, plus their ongoing fee – often 1% pa.
Then there is the product provider initial charge. Usually about 1.5% (taken up front – Option 1 charging) or staggered over five years (Option 2 charging).
If holding funds directly with the product provider, the fund choice is limited and there will be buying/selling charges. If ‘open architecture’, your money will be held on a platform (like Aviva or Fidelity). This gives greater fund choice and no buying/selling costs, but there is the platform charge to cover. In both cases there will be fund costs (taken directly from the funds). On top of that, the product provider takes a quarterly admin. charge, which increases by inflation each year.
Despite these potentially hefty charges, there are advantages…you could use inter-spouse gifting to move cash from, say, ‘decrepit’ husband to physically strong female (reverse genders if you are uncomfortable with this). This could be proceeds of a B2L property sale, or PCLS from a DB or DC pot. She can then settle the money into an FRT. She retains access to maturing segments each year (useful if extra money is needed in the event decrepit husband had a larger DB pension and passes away) and she needs money to support her or to pay for care. If she survives seven years, then the amount gifted into trust becomes outside of her estate. Another benefit is that maturing segments can be assigned to (younger) family members who are non or basic rate taxpayers. If family members are trustees, they ultimately decide who gets the money and when. This puts some checks and balances in place.
Not for everyone, but possibly worth exploring.
HTH
IncomeShares Coinbase Options ETP
hmm…you can access US listed ETPs right??
So…..what about the Yieldmax MSTR Option Income Strategy ETP (at an 87% dividend yield!) 😉
Ok, kidding aside, the big problem with IHT is the one dearly departed Roy addressed in the opening quote from 1986, namely that parents would rather die with the wealth of the Pharaohs intact than help out their offspring whilst they’re still around to see them enjoy it.
And that’s even though they loath the very thought of their estates paying so much as a penny in IHT.
Go figure that contradiction out.
No-one said that humans had to be rational – as recent political events evidence.
Let’s say (to keep it simple) you’re an only child and ‘ma and pa’ have accumulated £2mn notional value assets with £750k tied up in the house and £1.2mn in ISAs and SIPPs and say £50k in bank accounts.
Not a King’s ransom but not to be sniffed at either.
They’re both heading into their nineties and determined not to go into care.
Now, you then come along to visit them one weekend (say you’re in you fifties here) and you try to open up a civilised and sensible ‘forward look’ tax mitigation conversation over the dinner table (picture the awkward scene):
“err mum, dad, sorry to bring it up..but…well it’s just that, well… statistically speaking, you’re likely going to both be dead in a few years…
Obviously we all hope that won’t happen… but..you know…just like statistically speaking..and… um …what with your grandchildren finishing Uni and now needing to get together a deposit for a house..and well ..err..
Well..err…you know that seven year rule thing on Potentially Exempt Transfers..the one that your favourite Daily Mail columnist said that nasty Mrs Reeves might try and tighten up on…
We’ll..um…I was just thinking that …
Err, why are you looking at me like that?”
It just isn’t going to happen.
The parents are going to be terrified of care home costs and will hoard every penny just in case it might be needed at some point even though (again statistically) if they do ever go into care it’s unlikely to be for long.
Equally their only child isn’t going to want to appear to be a grasping b#@!@rd by bringing up the subject of them gifting assets.
And so, in the end (after spousal transferable nil rate and property nil rate bands are used), the taxman still gets his £400k IHT on the value of the parents estate over £1 mn.
This is the reality.
It’s a tax on embarrassment and on social norms as much as assets.
@ Delta Hedge #22 – I’m loath to be a typo geek but I do loathe this particular error 😉
9k a year into JISAs and 20k into their ISAs feels like a good strategy. Saving the 40% IHT and getting compounding tax sheltered growth.
Wife and I are 47 so we’re starting estate planning early. I don’t what to be a miserly old bugger who takes my money to the grave.
I think parents are now hoarding their assets in case they need a long stint in a nursing home, say, 5 years at £100k pa? Dementia care is the really costly one. On the other hand giving to the children and hope you live 7 years and it is not considered deprivation of assets. Tough choices.
I never understood the care home fee anxiety. I’m a consultant physician and I have a plan if I start to develop cognitive impairment. I will take my whole family to Switzerland for a fully paid for luxury holiday once a year. At the end of that holiday I will decide if I want to end it with dignitas or go home and come back the following year. If assisted dying becomes more widely accepted in the U.K. then that makes it easier. If I lose the game and end up in a care home I don’t care if it’s cheap and nasty, I just want my life to be over.
Another great article with some very interesting ideas, one of which might help my own family, so thank you very much for publishing this 🙂
A couple of thoughts on the property transfer:
1. Might a series of linked transactions between connected parties be investigated by HMRC and deemed to be artificial and therefore tax avoidance? In which case the re-basing to zero might be ignored for capital gains tax purposes.
2. Would there be stamp duty for Mike to pay when he acquires the gift from Mary? If so, this would work out at £123,750 in total at the new (second home) rates from 1st April 2025. So still a huge saving overall assuming point 1 doesn’t apply, but a significant cost to take into account.
Recent change to ISA rules, I think in 2023, means that Flexible Stocks & Shares ISA (check your provider offers this type, as not all do) mean that within the same financial year you may take money out and put the same amount back in, over and above your £20K allowance. If you are retired (me) you can take out all your dividend payments so tax free, and then just before end of financial year say 3/4 April, take money from your other assets, most likely your General Investment Account, and place the total amount you withdrew as dividends back into your ISA.
Terrific article which is timely for us. My wife and I are in our late 70s and statistically likely to last another 10-15 years, though on the evidence of our parents and people all around us our energy levels and related expenditure are likely to decline significantly by our mid-80s. In the event that either of us needs relatively expensive care then our house value will cover that in the unlikely (but, on the evidence of the last ten days, possible outcome, that our financial assets are eviscerated). Of course it is possible that our house value could also be eliminated by events too horrible to contemplate, but no amount of planning will deal with that eventuality, and a care home will not be any kind of answer. Also I support Marco’s views on assisted dying.
Unlike the examples you give in the article we have relatively large numbers of children (mid 40s to mid 50s) and grandchildren (teens to just 30). We have rather smaller resources than your examples, but large enough to qualify for significant IHT if we had died yesterday. Until the government decided to include SIPPs in estates for IHT purposes we had held on to them, even continuing to add £2880 + tax relief a year after our retirements until we were 75. They had done well invested in 100% world equity EFTs on the grounds that they would not be drawn down for very many years.
However, we are now drawing them down within the limits of our 20% tax bands. Depending on future market movements, and we have switched to cash for this year’s drawdowns and 60/40 for the balance, this additional income will last for between 5 and 10 years (7.5 at today’s values). By definition, it seems clear, this income is additional to that on which we have been coping adequately for many years, so should not prove to be a probem with HMRC.
Your explanation of the debate between regular distributions and lifetime gifts has helped us to decide to distribute the whole of this additional taxed income in small (£100 – £250) monthly payments to each of our children and grandchildren and charities. We will hope and encourage them (our offspring) to invest this bunce in ISAs or SIPPs but of course it will be up to them. This can be set up in a few hours and cancelled or amended if circumstances change significantly. The alternative of making decisions about selling assets and then not walking under a bus for seven years (or visiting Switzerland) would be fraught with anxiety about timings etc.
@Delta Hedge
Can I say something? Paying £400k IHT on a £2m combined marital estate is not the end of the world. I think people who want to keep, say, £1m in assets each just-in-case of care fees or whatever are being perfectly reasonable. And, TBH, they aren’t really the target for this sort of planning conversation. What you want to avoid is paying £2m on a £5.5m estate, or £4m on a £10m, because this is potentially avoidable without putting anyone in fear of financial distress.
I understand these conversations are difficult, and TBF, that might be easier for those families who, like mine, are sort of perennially hyper-financialised.
The conversation should always start with talking about ensuring that they have sufficient assets, not how helpful their assets would be to the grandchildren. With your example 90 year old couple is – How much do you need? £100k a year each, for every year of life expectancy, and then double it? So your 90 yos, would need about 5x2x100x2 each is £2m. This is also a premise that can be revisited, say, annually. A year later, they’ll have about 8 months less life expectancy, and asset prices may have risen or fallen. Now – how much do they have? £1.8m? No action Required. £5m – Maybe would should think about some mitigation strategies?
@ Explanner-explainer: many thanks.
On not giving your wealth away: we expect my wife to outlive me by many years. She is determined not to go into a “care home” if at all possible. So the intention is that she’d be cared for at home – eventually, presumably, by a resident carer. This is terribly expensive. That’s why we are reluctant to give away capital irreversibly. (It’s safer to give away income because you can change your mind and stop the flow.)
If she does stay at home the capital required to pay for her care will be our accumulated savings and investments plus, presumably, some equity release money.
If she’s like her mother she’ll end up with Alzheimer’s. She lived with it, in a care home, for several years, not knowing who her daughter was nor her husband.
Says Delta Hedge, in maximum twerp mode, “that parents would rather die with the wealth of the Pharaohs intact than help out their offspring whilst they’re still around to see them enjoy it.” In our case we have passed on everything we’ve inherited except for the £25 I got from an old aunt in my twenties. Now it is time to concentrate on our own problems.