‘One day son, just over half of all of this will be yours…..‘ In this edition I look at Inheritance Tax (IHT) – effectively double taxation paid as it is from the estates of those who have already paid loads of tax in their lifetime. In my postscript I look at how son #1 mitigates (my) IHT bill.
Market Commentary
Global property prices falling, UK stagnates but just avoids recession, inflation moderating (at last).
Inheritance Tax (IHT)
This should be called death tax. The first £325,000 of a person’s estate can be inherited tax-free. Furthermore, since that amount roughly equates to the value of a broom cupboard in Greater London, this was followed by the main residence nil-rate band (MRNRB) that grants an additional tax-free £175,000 based on property ownership. This situation is worsened if your investments, savings and property values go up, in this we can (sort of) be grateful for 2022 markets. For married couples these allowances are transferable on the first death.
There are things you can do but, to combat narcolepsy, I intend in this newsletter to look at gifting only. I have covered other options in a previous newsletter.
How can I (my estate) pay less IHT?
Gift Allowances: You can make gifts of £3,000 per year (two lots the first time) out of your saved assets.
Gift out of disposable income: You can also gift much higher regular amounts out of your normal income, providing that you can demonstrate that you can afford to do so. This is little known and sometimes allows significant amounts to be gifted. Keep records.
Give some (or all) of your money away: Potentially Exempt Transfers (PET’s) are where you give away as much money or value as you like and try not to die in the next seven years as the tax charge falls away.There is no limit to the amount. Before you reach for your chequebook or start transferring properties however, note the caveats of the ‘Four D’s’ below.
The Four 'D's
I use this as a mnemonic - if you can afford to make substantial gifts then you need to consider the following:
Death - If the person you are gifting to dies who gets the money? How do you feel about this? Will they in turn have an IHT liability you exacerbate?
Debt - If the person receiving the gift subsequently gets into debt or goes bankrupt your money will likely go to his or her creditors.
Divorce - Broadly in the UK assets are split 50/50. This is a worse rate of ‘tax’ than IHT...
Debility - If the person you gift to becomes mentally unwell then their attorneys or the Court of Protection controls their assets – you will likely have no say in it.
Summary
Plan to spend it, lose it, give it away, move abroad, leave it in pensions or to charities; failing to plan before you kick the bucket benefits the taxman. If you do decide to gift (for example) money to your kids then make sure you won’t need it for yourself in future in case they spend it – and consider the four ‘D’s. Keep records.
Disclaimer: I can either write this stuff in textbook fashion or try to make it readable. You can probably figure which approach I favour. This means it’s only a quickfire summary of what can be complex situations full of traps and pitfalls. If you want to look seriously at this you should really consider paying someone for advice, we don’t provide this advice specialising as we do in investment work, but we can point you in the right direction.
p.s.
BOMD. Bank of Mom and Dad. We continue to act as lender of last resort to son number one. For James money is stuff you only worry about when you are at the bar and your card has bounced. I have of course tried to teach him about money as has his brother Martyn but his interest is limited. He surprised me however when he asked me recently about death and IHT (his mates at work had been discussing death and anticipating / planning to spend their likely inheritances). Heartened by his interest I explained about IHT; sadly his conclusion is that by continuing to ‘borrow’ money off us he is reducing the value of our estates and hence reducing the future tax liability...