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Gifts from income to reduce - IHT but how to use capital
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D Bergman
Posted: 19 December 2024 09:03:22(UTC)
#53

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Rookie Investor;329060 wrote:
As a family we have decided to change tactic in terms of IHT mitigation for my parents' estate. Will not be utilising the excess income gifting. Instead we have/will:

- have taken the 25% TFLS from parents pensions already
- sold down fully parents ISAs
- gift the above proceeds plus some cash to nephews and myself
- take out 7-8 year term life insurance on parents to IHT cover the above proceeds gifted
- the remaining pension funds will stay as is
- estate will still be over £1m including pensions

Reasons for the change in tactic:
- hassle in keeping records for gifts out of excess income, and avoid risk of HMRC challenge
- excess income gifting to work effectively means that parents need to live long enough
- parents spending is only slightly below their income, and so it will only be the SIPP drawn money that would have been gifted
- do not have to pay income tax on pension withdrawals
- it is very likely my parents estate will still be above the £1m threshold on death - rather have income taxable pensions still in their estate as opposed to already taxed assets like ISAs, as IHT would apply on pre-tax assets - so less income tax to pay (***pending consultation decision)
- keeps majority of pension still in pension wrapper so still outside estate for IHT for another 2+ years
- wanting my parents to spend more, i do not like the idea of them deciding (perhaps subconsciously) not spending as much as they should just so they can gift more excess income


It all seems to make sense, although the argument that keeping income-taxable pensions in the estate rather than ISAs would mean that inherited pensions will be subject to income tax as well as IHT, whereas inherited ISAs would not be taxed as income.
Of course this is all assuming that the amendments to the IHT will go ahead as planned after the consultation.

What is increasingly obvious is that we will all have to arrange our estate planning in the way that we have always been told in the past not to do - the tax tail will be wagging the investment dog!

I would be curious what insurance company you have found to offer the policies - several that I spoke to seemed confused by what I wanted them to do.
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Rookie Investor on 19/12/2024(UTC)
Rookie Investor
Posted: 19 December 2024 10:42:06(UTC)
#54

Joined: 09/12/2020(UTC)
Posts: 2,087
D Bergman;329076 wrote:
Rookie Investor;329060 wrote:
As a family we have decided to change tactic in terms of IHT mitigation for my parents' estate. Will not be utilising the excess income gifting. Instead we have/will:

- have taken the 25% TFLS from parents pensions already
- sold down fully parents ISAs
- gift the above proceeds plus some cash to nephews and myself
- take out 7-8 year term life insurance on parents to IHT cover the above proceeds gifted
- the remaining pension funds will stay as is
- estate will still be over £1m including pensions

Reasons for the change in tactic:
- hassle in keeping records for gifts out of excess income, and avoid risk of HMRC challenge
- excess income gifting to work effectively means that parents need to live long enough
- parents spending is only slightly below their income, and so it will only be the SIPP drawn money that would have been gifted
- do not have to pay income tax on pension withdrawals
- it is very likely my parents estate will still be above the £1m threshold on death - rather have income taxable pensions still in their estate as opposed to already taxed assets like ISAs, as IHT would apply on pre-tax assets - so less income tax to pay (***pending consultation decision)
- keeps majority of pension still in pension wrapper so still outside estate for IHT for another 2+ years
- wanting my parents to spend more, i do not like the idea of them deciding (perhaps subconsciously) not spending as much as they should just so they can gift more excess income


It all seems to make sense, although the argument that keeping income-taxable pensions in the estate rather than ISAs would mean that inherited pensions will be subject to income tax as well as IHT, whereas inherited ISAs would not be taxed as income.
Of course this is all assuming that the amendments to the IHT will go ahead as planned after the consultation.

What is increasingly obvious is that we will all have to arrange our estate planning in the way that we have always been told in the past not to do - the tax tail will be wagging the investment dog!

I would be curious what insurance company you have found to offer the policies - several that I spoke to seemed confused by what I wanted them to do.


Assuming consultation as planned, if say you have £100k in ISAs and compared with £100k in pensions (post TFLS):

The ISAs would be IHT taxed at 40% so £40k tax with no income tax to pay. But 20% income taxed paid on pensions withdrawal (so £20k tax) due to gifting excess income etc. Total tax is £60k.

ISAs gifted all on day 1. The pensions would be IHT taxed at at 40% so £40k tax. If beneficiaries choose to withdraw and assuming 20% marginal tax rate, the income tax paid would be 20% on £60k so £12k tax. Total tax is £52k.

In the latter case, beneficiaries do not have to withdraw, or even have personal allowance to withdraw at 0% tax. But the difference reduces if you take out life insurance to cover the ISA gifting.

Have not approached any insurance company yet but looked at online quotes. Term life insurance is a pretty standard thing so should be pretty straightforward. What did you ask them to do specifically?
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D Bergman
Posted: 19 December 2024 11:24:44(UTC)
#55

Joined: 22/03/2018(UTC)
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Rookie,

Not sure I follow your tax calculations but I’ll try to figure it out.

Regarding term life insurance, you would want (ideally) a 7-year term insurance, with the amount insured steady for 3 years and then reducing by 20% per year (as does the IHT liability).
This should obviously be cheaper than a fixed amount for 7 years, and it your parents are anything like my age (75) a fixed amount of £100K for 7 years would cost about £150 per month per insured person
There is often a maximum amount companies will insure for, after a certain age.

One company I spoke to said that they would offer 5 policies, each for 20% of the amount needed, but for 3, 4, 5, 6, and 7 years each - giving the same results as a reducing policy.

(There is also the question of how much to insure each parent for, according to the percentage of the gifts made from each).

It is really quite a mess!
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Geoff Fitz
Posted: 04 March 2025 14:58:34(UTC)
#25

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D Bergman;325752 wrote:
On the points raised by the last two posters, I have decided that the question of how income and expenditure are divided between 2 members of a household (and indeed if we can combine them or each has to effectively gift from surplus income individually) is too important to me to leave to informed guesswork.
I am arranging a consultation with a specialist tax accountant (via my solicitor, who has used them for some time,).
Hopefully this will be worth the expense.

If I get any definitive answers I will post them, but this will take a few weeks.


I have discussed this issue with 2 IFA's now. The answer has been the same. You can give your spouse any capital sum and they can spend it how they see fit on household expenses but they cannot just gift it as excess income as a capital sum.

So I have increased my SIPP withdrawal and the top up I used from investments for general everyday living I give quarterly to my wife who now buys more food pays utility bills and buys more holidays. I on the other hand spend less and have greater income from the SIPP, some excess income which is given routinely to my daughter. We will spend roughly the same but more will be in my wifes name and less in mine. My wife previously had a credit card which was attached to my account she now has a credit card in her own name. Its a change of routine but according to both IFA's it's perfectly within the rules.
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D Bergman on 04/03/2025(UTC)
D Bergman
Posted: 04 March 2025 15:25:16(UTC)
#26

Joined: 22/03/2018(UTC)
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Geoff Fitz;336487 wrote:
D Bergman;325752 wrote:
On the points raised by the last two posters, I have decided that the question of how income and expenditure are divided between 2 members of a household (and indeed if we can combine them or each has to effectively gift from surplus income individually) is too important to me to leave to informed guesswork.
I am arranging a consultation with a specialist tax accountant (via my solicitor, who has used them for some time,).
Hopefully this will be worth the expense.

If I get any definitive answers I will post them, but this will take a few weeks.


I have discussed this issue with 2 IFA's now. The answer has been the same. You can give your spouse any capital sum and they can spend it how they see fit on household expenses but they cannot just gift it as excess income as a capital sum.

So I have increased my SIPP withdrawal and the top up I used from investments for general everyday living I give quarterly to my wife who now buys more food pays utility bills and buys more holidays. I on the other hand spend less and have greater income from the SIPP, some excess income which is given routinely to my daughter. We will spend roughly the same but more will be in my wife's name and less in mine. My wife previously had a credit card which was attached to my account she now has a credit card in her own name. Its a change of routine but according to both IFA's it's perfectly within the rules.


Geoff,
We seem to be working in parallel here.
I met with my new tax accountant last week, and the information she gave me confirms what you say.
In our case, my partner can take about £20K per year from her SIPP drawdown and keep her income tax within the 20% band, so she will gift the net from that (£16K) as surplus income to our son.
I will meanwhile gift what I can from my surplus income.

Incidentally, I have been given a quote for a Gift Inter Vivos Life Insurance policy, reducing as the potential IHT is reduced. The policy, made out in trust to my son and for a value of £120K, will cost me £132 per month. Obviously this would be cheaper if the policy holder was younger than I am (75).
So a PET gift of £300K will be covered for the IHT for a total cost (assuming I live for 7 years) of £11K; not cheap but better than the IHT and a known quantity.
(If someone prefers a fixed payout policy rather than a reducing one, the price I was quoted was £152 per month).

The policy I was quoted was with LV, but I'm sure other insurers will be offering similar policies.
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