More easy inheritance tax tips
FOLLOWING on from my two recent columns on inheritance tax, I have a couple more useful tips from your questions that you might find useful.
I used to park for free on the street, at the hospital; there was no tax on my insurance premiums; the NHS provided me with care when I needed it. I could go on.
Meanwhile I can send a ‘letter’ in a split second (email) and cut out huge paper costs and time, create a business transaction in one hour that would have taken days with faxes, letters and stamps.
I can sit in meetings around the world instantaneously with my shorts and flip flops on, as long as I have a nice shirt. My small phone is over 500 times smaller than my first computer and my broadband connects at over 1,000x faster than my first computer.
If everything is so much easier, why is it then that my costs are constantly rising and taxes with it?
So, after being taxed to high heaven during our lives, the ever-popular inheritance tax takes its 40 per cent slice.
:: Your pension: those under the age of 75 on death are allowed to pass all their pension benefits in a money purchase scheme direct to their beneficiaries without having to pay tax. After that, there is a tax applicable at the marginal rate of income tax of the beneficiary.
It therefore makes sense during your lifetime (up to age 75) to use your taxable income and savings inside your taxable estate to provide you with income and capital and allow that pension pot to roll up.
:: Life insurance: I’ve written on this before, but a quick tip: If you wanted to keep all your investments fluid and still in control, you can insure against it. Normally when you buy insurance for a large tax sum, the premiums can be hefty, but, that is when you set it up with a joint life first death. A joint life second death policy is cheaper and that is the plan normally needed to protect against the cost of Inheritance Tax.
You calculate the potential tax, insure you and your partner against that amount, and set the plan to pay out on second death. The amount is written into a trust which passes directly to the beneficiaries free of tax who then pay the tax bill. I can argue that the premiums are paying some of the tax in advance but there is considerable flexibility in knowing that you don’t need to lock away assets now.
Those with a large amount of fixed assets, particularly after their recent surge (a house and objects that aren’t liquid like cash) can be a bit capital tied. How do you give away your house and still retain an interest in it without falling foul of the gift with reservation rules for example?
One of many options is to create debts inside your estate while moving capital outside your estate. If you use an equity release plan with an independent financial adviser and your solicitor and raise capital against the house, the debt grows inside your estate. On death, that debt is subtracted from your taxable estate reducing the tax payable.
Meanwhile the capital you have raised is of course still inside the estate, so this is placed into a trust for the benefit of the beneficiaries. There are many options, but I’ll use the discounted gift trust I referred to a couple of weeks back to explain a way to take this outside the estate.
The capital raised against the home is placed into a trust which provides you with access to withdrawals (your ‘income’) from the trust over the rest of your life. After seven years the money gifted is outside the estate along with the growth on it but it also benefits from a discount in between.
The revenue calculate the right you had to the withdrawals (your ‘income’) and based on the amount and the age, the gift is discounted by that.
So, after seven years, you have a debt inside your estate and the capital and its growth outside the estate.
As the withdrawals arrive each year, they could be redirected to beneficiaries so as never to come into the estate.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have an inheritance tax question call Darren McKeever on 028 6863 2692, email firstname.lastname@example.org or visit wwfp.net.