Inheritance tax query from a novice

7th Dec '18 by Jonathan777

77 comments 5140 reads

My very elderly widowed mother has been advised by a well-meaning relative to invest most of the proceeds from the proposed sale of her quite substantial family home into Business Property Relief (BPR) schemes in order to reduce inheritance tax, because these investments would fall outside her estate if she lives for another 2 years. While I know nothing about BPR schemes, it strikes me that this introduces a high level of risk to her capital, because presumably the investments into the BPR schemes can fall as well as rise. Yet the friend has said to her that investment into 'developers' outside AIM (so presumably unquoted companies eligible for BPR?) are very low risk. I'd be grateful for any thoughts on whether investing a large amount of cash in this way at my mother's advanced age is a good idea.

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Jonathan777

20th Dec '18

We will certainly look at this. Thanks.

timarr

Hi Jonathan

Presumably the gift-of-shares issue timarr has kindly identified applies equally to shares both inside and outside of any ISA?

The issue doesn't arise. You can't gift the ISA, that's a personal thing, so in order to transfer an ISA to you your mother will either need to transfer the shares out (CGT free) or sell the shares in the ISA and transfer the cash out (CGT free) and then transfer the shares or cash to you - triggering CGT.

Basically anything we can spot the taxman has already covered.

Michael Ridyard

Jonathan,
Just one point, make sure your mother puts together a Gift Letter to each recipient, which should state:
I hereby certify the following:
- Details of the gift and value and name of recipient.
No repayment of this gift is expected or implied from the recipients in cash or services.
- Date the gift was made
- Recipients address
- Donor Name & Address
-Donors Signature and printed name
- Recipients Signature and printed name

You can do this yourself or get a solicitor involved.

Will do. Thank you.

You can't gift the ISA, that's a personal thing, so in order to transfer an ISA to you your mother will either need to transfer the shares out (CGT free) or sell the shares in the ISA and transfer the cash out (CGT free) and then transfer the shares or cash to you - triggering CGT.

Most helpful, thanks. I guess the sensible approach is not to run the risk of paying tax twice – CGT and IHT. Something to discuss with the adviser. Perhaps best for my mother to hang on to her share portfolio.

Jonathan,
timarr is quite right you can't gift an isa to a child for example and anything sold and transferred out of the isa would be CGT free. Providing your mother lives for 7yrs then the money will not be subject to IHT. My understanding is that if you gift the money from the sale of the isa away there will not be any CTG liability.

My understanding is that if you gift the money from the sale of the isa away there will not be any CTG liability.

Thanks, Michael. Not sure if I've understood you correctly here, but timarr is saying that gifting the money from the sale of the ISA does in fact trigger CGT.

Thanks, Michael. Not sure if I've understood you correctly here, but timarr is saying that gifting the money from the sale of the ISA does in fact trigger CGT.

I was saying that, but I'm wrong. As there's no CGT liability on the shares as they're sold out of the ISA the CGT "buy" price is effectively the price at which they're transferred out. Michael is correct - as long as you manage the sale of the ISA and transfer of the monies correctly - i.e. virtually simultaneously - then there'd be no CGT liability.

Apologies - although I'd argue that just proves my point that you need a proper advisor :)

Brilliant. That's great to know. Thanks.

GrahamF

Or give everything above the nil rate band to charity in the will and there’s nothing to pay the tax man at all, no complicated calculations involving IFAs, no stressing over risk in AIM portfolios, and still a very handsome amount for beneficiaries within the nil rate band.

The deceased no longer has a need for that money after they have passed away, so unless the family really needs more than the NRB......., can any of us say we really need more than the NRB,.....the charity option makes a lot of sense.

We generally are concerned to manage our affairs to avoid (legitimately) paying unnecessary taxes on our income. That can make us focus on what the tax man is getting from IHT, when the easy way out is simply to give the extra wealth above the NRB to charity instead.

A fascinatingly different perspective. I'd be interested to learn what others think.

21st Dec '18

The decision to leave money to charity as opposed to family or friends is a personal one, each of us has to make our own choices.

However, if you do go down this route make sure your mother gets proper professional advice over her will. I know of at least two examples of badly drafted wills that ended up in court with the charity suing the family to maximize their part of the legacy.

In one case the deceased had left a fixed sum to charity and the, at the time, considerable, residue to the family but sadly by his death the value of his estate had decreased to the point where liquid funds didn't cover the charitable bequest. Family members ended up taking out mortgages to pay the charity off rather than being forced into a property sale at a depressed price.

In my limited experience charities are extremely aggressive in pursuing estates for their share of the funds. As is often the case when a well organised institution takes on an individual the odds are stacked in favour of the institution.

This is no reason not to give money to charity, but it does highlight the need to make sure it's done properly. This Money Advice Service page is a useful guide to the advantages of doing so:

https://www.moneyadviceservice...

peterg

I agree with a lot of what you say, Graham, but while I will make some limited charitable donations on my death, I'm not making any special arrangements to avoid IHT. I'm more than happy for my estate to pay its share. Tax revenues are essential for the running of the country and the services we all expect - NHS, defence, education, social services - all of which are currently underfunded. So while I will choose to pass a part of my estate on directly to a small charities that I have a particular interest in, they will be a small part of it. At present I regard the IHT exemptions limits as far too high, and there are very few cases in which families need to be protected from IHT on estates to anything like the current levels.

JohnEustace

It's not easy to know which charities will make good use of a bequest. Some are very poorly run.
GiveWell does thorough research to find the ones that deliver the most benefit from their income.
https://www.givewell.org/charities/top-charities

Peterg, absolutely agree that we should all be paying a fair share of tax to provide public services. It is a personal choice as to whether one feels that the public purse rather than a specific charity is the best way to help others.

JohnEustace, that’s a good point. Some charities seem more intent on expounding a one sided political view and are too involved in political lobbying and some are simply poorly run. Choosing carefully is important. My main charity is my local hospice as I feel it provides the community with vital support, regardless of people’s background, and the alternative would often otherwise be taking up space in scarce hospital beds.

Well, to posit an alternative view ... the changes in our economy have led to an intergenerational imbalance in wealth. Older people have benefited from huge rises in property prices, largely as a result of low interest rates - pensioner property values are in excess of a trillion pounds. At the same time the younger generation are virtually being forced to go to university and take on student debt, which then acts as a drag on their ability to save for mortgages on inflated house prices - and which means they have to rent, often from older buy-to-let investors.

That imbalance could - and perhaps should - change by the old downsizing and passing their savings onto their children or even grandchildren prior to death. If you argue that a large part of estates are a result of an accidental transfer of wealth from the young to the old then it makes sense to reverse that flow, while avoiding IHT and resolving some of that imbalance. Frankly the money is of more use to our children in their 30s and 40s than it will be in their 50s and 60s when most us will finally shuffle off our mortal coils.

As for the government needing the money to invest, overall IHT is a tiny part of the government's income - the government this week has already set aside the equivalent of almost all of the IHT income for next year on no-deal planning. If we want to help the government raise taxes then giving money to our children so that they can spend it on houses, home improvements and raising future taxpayers is likely to raise far more money for the Exchequer in the long run.

22nd Dec '18

My view is that Jonathan's parents will have more than likely been higher rate tax payers and will have paid their fair share of income tax already on their assets and savings. The issue of fairness is more to do with the capital gain treatment on assets like homes which have increased in value over many years of ownership. I am classed as one of the baby boomers and possibly have become the last generation to prosper more than their parents. I say that even though my children have had a better education than I have had. When you look for the reason why it all comes down to the average cost of purchasing a home to the average salary. Average house prices are roughly 8 x the average UK salary and only 5 x when i purchase my first home. The bank of Mum and Dad is becoming essential to help youngsters onto the property ladder and inheritance benefit has also become far more important. timarr raises an important point regarding University fees which did not apply when I went to university. Only 4% of my generation went to university whereas around 40% go today. It has been estimated 75% of university students will not pay off their student loans which can be as much as £70K. The target salary is £25K. What a tragic state of affairs. There's no doubt education is important but it needs to be targeted at a more vocational level as it was in my generation. Anyway we are stuck with the problem now so i would suggest most people will want to pass on any wealth accumulated to their children to help them raise their families.

24th Dec '18

Perhaps I didn’t make my point clear. I’m talking about leaving the amount above the nil rate band to charity not the entire estate. So, where a married couple have children that means 2 lots of standard nil rate band £650k plus the residential NRB, potentially 2 lots of £175k, on top of that. So potentially £1m tax free in a couple of years’ time.

Unless there are an unusually large number of children in the family this still gives each of them a very substantial sum of money to help them pay off their mortgage, university debts, or whatever. So, leaving the surplus above the NRB and RNRB to charity is not depriving the children of considerable financial help.

Not sure I get the point about the amount of IHT being raised being insignificant for the government. It is more than £5bn. You could increase the amount being spent on transport by 15% with that.

Hi Graham

Well, I understood the point.

The IHT raised by the state has to be viewed in context. It's a bit like the discussion around the EU budget payments - it's a terribly big number out of context, but if you look at government spending as a whole it's really not.

The UK budget for 2018 was £800 billion. IHT is less than 1% of that and I would argue that's insignificant in the context of government spending. Worse, IHT is a regressive tax - the richest people don't pay it, because they have good and entirely legitimate estate planning. It's a rough rule of thumb that any tax that means richer people pay less tax proportionately than poorer people is a bad one. For more context - raising income tax by 1% would raise the same amount of money as IHT and would be far less regressive.

But if people wish to leave their estates to the government because they feel an obligation to help fund it then there's nothing to stop them doing so.

My broader point, however, was that it's far better to give away the inheritance before death. If the typical UK person dies at around 85 and they were on average about 30 when they had children those children will inherit in their mid to late 50's. Frankly, by that point they should already have sorted out their finances, no matter how great a struggle it was. Given the inter-generational wealth dispersion it would be better if people gave their children a part of their inheritance twenty years before that. And if we do that then a lot of the IHT discussions are moot.

potter12

Some very good contributions to this thread. Can I add to timarr’s post above?

As someone who is 70+ I agree with the suggestion of giving away substantial amounts while you can.

If you plan to become a successful investor and you are in your forties or fifties it is worth considering how you are going to dispose of your success. Let’s say you are in the position of aiming to have an estate worth more than a couple of million as in the example above. One way of solving some of the IHT problem is to give a substantial portion away. Because most people don’t need multi millions when they reach my age.

Giving to one’s children is best done early, especially if they may become wealthy too. As has been said, it’s much better to financially help when your children have a young family or earlier.

And, if one is lucky enough to be able to give substantial sums to charities the rewards can be much more enjoyable looking back than the most expensive holidays or fastest cars. And so much better than building up a large IHT liability. Researching the charities which are most worthwhile from a personal view and then following up with a targeted gift programme can lead to some very interesting experiences. It also makes investing successfully much more enjoyable. And, if you choose wisely it can lead to meetings with some really interesting people.

Good investors who have done their research during their build-up phase should have the skills to choose really worthwhile charitable projects.

Sadly when you are in your seventies you come across people who spent too long accumulating and who leave problems of surplus wealth when they die. They could have had fun with it if only they had made different decisions when they were younger.

regards

Potter

Inheritance tax query from a novice

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Jonathan777

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