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SIPP INHERITED NOW TAXED???
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Hilda Ogden
Posted: 02 November 2024 19:14:36(UTC)
#132

Joined: 31/07/2023(UTC)
Posts: 892
D Bergman;324335 wrote:
Hilda Ogden;324328 wrote:
Seems to me the insurance people could have a whole new income stream. Say I give away £500,000 when I'm 70. I might live seven years and the recipients of the gift are home and dry. There's a reducing liability over the seven year term. So I don't need an insurance policy to simply pay 40% on death. There's a type of insurance policy called decreasing term assurance. It's cheaper than normal life insurance because it will only run for seven years and as those years pass, the tax liability to be covered by the policy reduces. Should I expire at say 75, the policy pays the tax due. Should I live the full seven years, the policy lapses. I think there's an opportunity there.


The issue with decreasing term insurance - to my knowledge - is finding one that does not reduce for 3 years and then starts reducing by the correct percentages.
But I am sure that an enterprising insurance broker will figure it out!

I expect there's a whole new product opportunity here. At least the industry has over two years to work it out.
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Mikesmusing
Posted: 02 November 2024 19:47:25(UTC)
#125

Joined: 26/08/2015(UTC)
Posts: 127

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D Bergman;324335 wrote:
Hilda Ogden;324328 wrote:
Seems to me the insurance people could have a whole new income stream. Say I give away £500,000 when I'm 70. I might live seven years and the recipients of the gift are home and dry. There's a reducing liability over the seven year term. So I don't need an insurance policy to simply pay 40% on death. There's a type of insurance policy called decreasing term assurance. It's cheaper than normal life insurance because it will only run for seven years and as those years pass, the tax liability to be covered by the policy reduces. Should I expire at say 75, the policy pays the tax due. Should I live the full seven years, the policy lapses. I think there's an opportunity there.


The issue with decreasing term insurance - to my knowledge - is finding one that does not reduce for 3 years and then starts reducing by the correct percentages.
But I am sure that an enterprising insurance broker will figure it out!


You could buy a few level term assurances for different terms to provide the cover you want
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2 users thanked Mikesmusing for this post.
SSJ on 02/11/2024(UTC), Tim D on 03/11/2024(UTC)
Law Man
Posted: 02 November 2024 22:37:32(UTC)
#137

Joined: 29/04/2014(UTC)
Posts: 675
When IHT at 40% is introduced wef 06/04/2027, investors will look at alternative ways to mitigate IHT.

One way is to draw cash from SIPP and make regular (monthly) payments to the beneficiary. This is the ‘regular gifts out of surplus income’ exemption.

Example: already I have sufficient income to cover my needs. I set up regular monthly payments as follows:

(1) draw £500 per month from SIPP

(2) pay £500 pm to the beneficiary.

This seems to work. Keep records to show the facts, if needed to satisfy HMRC.

One aspect is whether drawings from the SIPP are “income”.

(1) if you draw in the form of taxable income, it seems Yes. Of course you lose at least 20% in Income Tax.

(2) Can you draw from the SIPP drawing parts of your 25% Tax Free Lump Sum via flexi-access draw down? Is this income or drawing out capital?

Answers please on a postcard or by posting reply on this site.
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Alex Peard
Posted: 03 November 2024 00:03:28(UTC)
#142

Joined: 05/05/2012(UTC)
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I believe the consultation relates primarily to the technical issues around pension providers liaising with executors and their being able to pay the IHT due from the SIPP directly otherwise the beneficiaries might have to gross up the deduction to pay IHT depending on their tax rate. This would be before they withdrew any sums themselves. I don’t expect any change in the substance for 2027, but may be wrong!

In my case adding in the SIPP will mean losing the main residence nil rate, so a further hit of £140k. Some options I’ve thought about are:
Maximise withdrawals up to top of 20% (currently draw very little) and put £20k into each of the children’s ISA’s, but this will not do much.
Give away/spend money in our ISA’s without jeopardising our security.
Consider annuity if necessary after first death to reduce estate below £2m and then possible life assurance policy to cover all or part of IHT liability.

All needs careful thought as hopefully we will live well beyond this government and rules may change!

I’m mindful of a late friend who put his house in his children’s names 25 years ago and had to pay them the market rent each year and now he’s passed away they are liable for CGT on the sale. If he’d kept the house no IHT would be payable as estate below the threshold.
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3 users thanked Alex Peard for this post.
Mr Bean on 03/11/2024(UTC), Guest on 03/11/2024(UTC), Dexi on 03/11/2024(UTC)
D Bergman
Posted: 03 November 2024 09:32:51(UTC)
#138

Joined: 22/03/2018(UTC)
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Law Man;324351 wrote:
When IHT at 40% is introduced wef 06/04/2027, investors will look at alternative ways to mitigate IHT.

One way is to draw cash from SIPP and make regular (monthly) payments to the beneficiary. This is the ‘regular gifts out of surplus income’ exemption.

Example: already I have sufficient income to cover my needs. I set up regular monthly payments as follows:

(1) draw £500 per month from SIPP

(2) pay £500 pm to the beneficiary.

This seems to work. Keep records to show the facts, if needed to satisfy HMRC.

One aspect is whether drawings from the SIPP are “income”.

(1) if you draw in the form of taxable income, it seems Yes. Of course you lose at least 20% in Income Tax.

(2) Can you draw from the SIPP drawing parts of your 25% Tax Free Lump Sum via flexi-access draw down? Is this income or drawing out capital?

Answers please on a postcard or by posting reply on this site.


Several points:

1. "Gifts out of surplus income" means that even after gifting, your normal expenditure must be from income, not drawings from capital.

2. Income in this case can include income that would not be subject to tax; ie: dividends or interest from ISAs. Income does NOT include, for example, the capital portion of an annuity.

3. You do not have to do this on a monthly basis as per your example - annual is fine. I used this to buy my son/grandchildren ISAs.

4. The question of whether drawings from a SIPP count as income solely, or could be partially capital drawings (even if you pay income tax on the drawings) is not clear to me - I have not been able to find a reference to this in HMRC's guidelines, but will continue to search. I suspect there will be HMRC guidelines and subsequent court decisions about this.

5. I cannot stress enough the importance of keeping clear records of income and expenditure. I have a spreadsheet with about 15 rows of expenditure (eg estimated food, clothing, holidays, house insurance, vehicle tax/MOT/servicing, regular charity contributions, etc).
It's a bit of a pain to set up, but then you just need to update regularly in a new column for the current year.
To increase the chances of HMRC accepting your calculations, it would be prudent to end up with more surplus income than you are gifting - in my case, if the spreadsheet showed a surplus of £30K, I gifted £25K at most.

Investors Chronicle article on Surplus income gifting in general (but nothing on the SIPP issue):
https://www.investorschr...-504d-886e-43449a0a50b5

Also for HMRC example of documenting "normal expenditure", see the following, on page 8:
https://assets.publishin...4487bf0/IHT403-05-20.pdf
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6 users thanked D Bergman for this post.
Jay P on 03/11/2024(UTC), Carl blue nose on 03/11/2024(UTC), Dexi on 03/11/2024(UTC), Alex Peard on 03/11/2024(UTC), Tim D on 03/11/2024(UTC), Kevin Crane on 04/11/2024(UTC)
malc1111
Posted: 03 November 2024 09:45:35(UTC)
#133

Joined: 02/12/2017(UTC)
Posts: 376
Hilda Ogden;324328 wrote:
Seems to me the insurance people could have a whole new income stream. Say I give away £500,000 when I'm 70. I might live seven years and the recipients of the gift are home and dry. There's a reducing liability over the seven year term. So I don't need an insurance policy to simply pay 40% on death. There's a type of insurance policy called decreasing term assurance. It's cheaper than normal life insurance because it will only run for seven years and as those years pass, the tax liability to be covered by the policy reduces. Should I expire at say 75, the policy pays the tax due. Should I live the full seven years, the policy lapses. I think there's an opportunity there.


how do you avoid tax on the 500K in the first place if coming from a pension
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D Bergman
Posted: 03 November 2024 09:55:35(UTC)
#135

Joined: 22/03/2018(UTC)
Posts: 1,308

Thanks: 1686 times
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malc1111;324370 wrote:
Hilda Ogden;324328 wrote:
Seems to me the insurance people could have a whole new income stream. Say I give away £500,000 when I'm 70. I might live seven years and the recipients of the gift are home and dry. There's a reducing liability over the seven year term. So I don't need an insurance policy to simply pay 40% on death. There's a type of insurance policy called decreasing term assurance. It's cheaper than normal life insurance because it will only run for seven years and as those years pass, the tax liability to be covered by the policy reduces. Should I expire at say 75, the policy pays the tax due. Should I live the full seven years, the policy lapses. I think there's an opportunity there.


how do you avoid tax on the 500K in the first place if coming from a pension


You can't.
The point would be to pay the tax (ideally withdrawing over some years keeping the tax to 20%), so mitigating the issue.
If you haven't used your tax-free sum, you can take that and gift it.
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Hilda Ogden on 03/11/2024(UTC)
Hilda Ogden
Posted: 03 November 2024 09:56:22(UTC)
#134

Joined: 31/07/2023(UTC)
Posts: 892
malc1111;324370 wrote:
Hilda Ogden;324328 wrote:
Seems to me the insurance people could have a whole new income stream. Say I give away £500,000 when I'm 70. I might live seven years and the recipients of the gift are home and dry. There's a reducing liability over the seven year term. So I don't need an insurance policy to simply pay 40% on death. There's a type of insurance policy called decreasing term assurance. It's cheaper than normal life insurance because it will only run for seven years and as those years pass, the tax liability to be covered by the policy reduces. Should I expire at say 75, the policy pays the tax due. Should I live the full seven years, the policy lapses. I think there's an opportunity there.


how do you avoid tax on the 500K in the first place if coming from a pension

I can't. I have a choice of 40% income tax or 40% inheritance tax.

I was thinking more of giving away capital from house downsizing or liquidating other non pension savings.

It is possible to mitigate the IHT with term assurance policy but that is something that needs further thought. I think it likely the insurance industry will be looking closely at how this all gets implemented.

Of course there's going to be many elderly folks who are uninsurable, triple bypass patients, cancer patients etc.... Anything resembling life insurance will not be available to them.
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2 users thanked Hilda Ogden for this post.
D Bergman on 03/11/2024(UTC), Kevin Crane on 04/11/2024(UTC)
Hilda Ogden
Posted: 03 November 2024 09:58:38(UTC)
#136

Joined: 31/07/2023(UTC)
Posts: 892
D Bergman;324373 wrote:
malc1111;324370 wrote:
Hilda Ogden;324328 wrote:
Seems to me the insurance people could have a whole new income stream. Say I give away £500,000 when I'm 70. I might live seven years and the recipients of the gift are home and dry. There's a reducing liability over the seven year term. So I don't need an insurance policy to simply pay 40% on death. There's a type of insurance policy called decreasing term assurance. It's cheaper than normal life insurance because it will only run for seven years and as those years pass, the tax liability to be covered by the policy reduces. Should I expire at say 75, the policy pays the tax due. Should I live the full seven years, the policy lapses. I think there's an opportunity there.


how do you avoid tax on the 500K in the first place if coming from a pension


You can't.
The point would be to pay the tax (ideally withdrawing over some years keeping the tax to 20%), so mitigating the issue.
If you haven't used your tax-free sum, you can take that and gift it.

Many of us, me included, are already drawing upto the higher rate tax threshold anyway. I already have more income in the SIPP than I drawdown every year.
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2 users thanked Hilda Ogden for this post.
Jay P on 03/11/2024(UTC), Kevin Crane on 04/11/2024(UTC)
Busy doing nothing
Posted: 03 November 2024 11:10:38(UTC)
#143

Joined: 01/03/2021(UTC)
Posts: 377
Deleted
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