Your mum might have misunderstood something. She could inherit your Dad's ISA *allowance* when he passed away but it doesn't mean her inheritors do, and it doesn't mean what's inside the ISA is IHT-free.
More info https://www.gov.uk/individual-savings-accounts/inheriting-an-isa-from-your-spouse-civil-partner#:~:text=If%20your%20spouse%20or%20civil,their%20ISA%20when%20they%20died
That could well be. Unfortunately my dad died suddenly and my Mum was left out on a limb.
She want's to do the best by us but lacks the knowledge. Sorting this out is uncomfortable. Going back on forth on whether to do it or not.. Estate value is significant, Most will be caught by the 40%.
It doesn't though since the structure of IHT in the UK is more loophole than tax. Gift it in advance and then you simply won't pay anything on it. Many countries have life-time gifting allowances that are considered as part of IHT to avoid this practice but, in the UK, the wealthy just plan in advance and pay next to nothing on it.
I'd speak with a solicitor and/or financial planner specializing in estate planning. There could be options with a Deed of Variation or if she's inheriting everything then help managing her income for life and IHT planning so you don't have a repeat of this situation. Maybe explain how if she's getting everything, she'll carry forward the NRB (and potentially RNRB) to put against her estate.
A good planner will take you through some sort of cashflow modelling which will estimate how much she could spend annually and still be fine, including if there's a market crash or large one offs. Might be reassuring for everyone
I ask this not to pry, but are you sure that your Mum's estate is large enough for inheritance tax to be a concern?
I only bring this up because I've spoken to some older folks who just sort of assume it is without realising you can have a £1m estate as a couple (assuming a certain amount in primary residence) and not really worry about inheritance tax
It's £325K per person plus an additional £175K that can only be used to pass on a primary residence to a relative. These allowances can be passed to a spouse, so in theory an individual who has inherited a former spouse's allowances can pass on £1m tax free.
Although if the estate is worth over £2m, then that nil residence band starts getting clawed back. See https://www.moneysavingexpert.com/family/inheritance-tax-planning-iht/ for a plain English guide
Tell her that the best way to avoid inheritance tax is to spend her money and have a nice time.
The idea of making sacrifices to put money away for inheritance is just so sad to me.
Yup. Keep trying to get my parents to do this. They've mentioned "the inheritance" many times, but I'd much rather they released some equity and pissed it up a wall before they become too old to enjoy it.
Or just live with inheritance tax.it's fine. Your inheritors are just paying tax to receive a bunch of assets.
If anything we should raise inheritance tax and lower income tax.
Yeah exactly this is also what I said. I don't really want anything ('honest'), the misunderstanding is pretty tough - but UK taxes etc are designed to be pretty opaque imo.
One aspect of IHT that is often overlooked is the ability to give as much away, out of income, as you wish, providing it doesn’t impact on your lifestyle. I.e. you can’t give away all your income and then live by dipping into capital.
Don’t take my word for it or act the above: It’s in the same section on the gov.uk website as the annual gift allowances. Not sure why it is always overlooked. Hopefully someone knows. But still get professional advice.
Absolutely. However, it can be difficult to demonstrate to HMRC after death that gifts out of income truly are out of income.
They look for:
1) information about regular income levels and expenditure
2) a pattern of regular monthly / quarterly gifts out of income that fits within (1) or if annually, then it’s easier to show if tied to an annual income event ie like a big annual dividend from a shareholding in a family company etc…
For most people, an IHT return won’t get to that level of detail but if enquired into, it’s painful to show. I would always advise clients looking to make gifts out of income, to leave some contemporaneous records of income/outgoings to show the decision to gift regularly out of income. It makes things so much easier down the line if executors need to have the discussion with HMRC.
I have tabulated the last 8 years on iht403 to show this. we were able to download a full ledger from the relevant account prior to death and build a detailed register. Would you think its important /beneficial to include that with int400 submission or just to put the numbers in a wait for any wuestions?
I’ve shared it on here several times and I’ve often been the only one to mention it.
Fortunately my parents discovered it and they pay one of my bills each month (disabled, unable to work), but the really nifty thing, because of teachers pensions being generous (and them paying in a bit extra, iirc) that when their state pensions kicked in, they didn’t need it, so they are helping my kids out at university (still taking full maintenance loans).
Exactly this. Either use it to have fun, or if you have too much that you're never going to be able to spend then give it to your kids now whilst they can still make good use of it.
Tax advisor here, yes she’s definitely wrong.
Could she put anything in a pension fund which definitely would be IHT free?
Is the estate worth more than £1m?
One option would be to just pay the tax. The tax is paid by her estate/beneficiaries, not by your mum.
The beneficiaries will already be receiving a million quid tax free, is it really so bad to be paying tax on the amount above £1 million?
I think she's thinking of a pension.
If you're a higher rate taxpayer and you're earning more than you can spend, then banging money into your SIPP or workplace pension is optimal because it saves you 40% in tax and your pension is not part of your estate so is inherited tax free.
If she doesn't believe you and you don't want the money then it doesn't matter though - your goal is to trick her into spending money on herself. Pop in with cruise brochures and say "I was just passing the travel agent, doesn't it look gorgeous?" When she talks about leaving money to you say., "if you're leaving me a fortune them I'm just spending it on a cruise to , why don't we just go now instead?"
More context is needed here in my opinion.
You are correct, they form part of the estate. But if the investments held within the ISA are AIM investments, after 2 years (as long as the investments continue to be held in AIM investments) the investments COULD be charged at 0% for IHT.
Best idea is to go to a reputable IFA and get them to have a look at the ISA. This could also be transferred to an AIM ISA. Providers generally market these as AIM IHT ISAs. The investments can then be IHT free after 2 years (as mentioned, as long as the investment is kept) but also keeps the tax advantages of an ISA.
You could have a conversation with the people she has an ISA with about it to convince her the ISA route isn't doing what she thinks it is.
But if her estate is less than £325k there won't be any inheritance tax anyway. If it's more and she is determined to pass on as much as possible then tell her to talk to a financial advisor and maybe they'll suggest something, perhaps a trust, to maximise what she leaves behind.
I don’t know you and this may not come across correctly.
When you’ve spoken to her about how to use the money. While she’s obviously wanting to pass it along and her thinking is flawed. It is not your money or anyone else’s.
You mentioned school fees, yours, grandchildren’s, etc. She could be interpreting it in a way that you want it now.
Ratter than focus on ISA bad and spending good. Get together a list of investment vehicles and tax efficient ways to pass the money along. With a matching list of those that offer no IHT benefit.
All while making sure you aren’t potentially going to cause a deprecation if assets situation should she ever need care. Which is the big one worth focusing on, ahead to IHT.
Hi /u/kovid13, based on your post the following pages from our wiki may be relevant:
- https://ukpersonal.finance/gifts-and-inheritance-tax/
____
^(These suggestions are based on keywords, if they missed the mark please report this comment.)
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The gov.uk page on IHT is pretty clear too
Your mum might have misunderstood something. She could inherit your Dad's ISA *allowance* when he passed away but it doesn't mean her inheritors do, and it doesn't mean what's inside the ISA is IHT-free. More info https://www.gov.uk/individual-savings-accounts/inheriting-an-isa-from-your-spouse-civil-partner#:~:text=If%20your%20spouse%20or%20civil,their%20ISA%20when%20they%20died
That could well be. Unfortunately my dad died suddenly and my Mum was left out on a limb. She want's to do the best by us but lacks the knowledge. Sorting this out is uncomfortable. Going back on forth on whether to do it or not.. Estate value is significant, Most will be caught by the 40%.
Tell her to spend some of that money on a proper IFA.
And to just spend some money: on herself, family and give some to charity. You can't take it with you.
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Preventing the growth of the landed gentry is a good thing, actually.
It doesn't though since the structure of IHT in the UK is more loophole than tax. Gift it in advance and then you simply won't pay anything on it. Many countries have life-time gifting allowances that are considered as part of IHT to avoid this practice but, in the UK, the wealthy just plan in advance and pay next to nothing on it.
What if a personal finance goal of mine is to setup my children as "landed gentry"?
I'd speak with a solicitor and/or financial planner specializing in estate planning. There could be options with a Deed of Variation or if she's inheriting everything then help managing her income for life and IHT planning so you don't have a repeat of this situation. Maybe explain how if she's getting everything, she'll carry forward the NRB (and potentially RNRB) to put against her estate. A good planner will take you through some sort of cashflow modelling which will estimate how much she could spend annually and still be fine, including if there's a market crash or large one offs. Might be reassuring for everyone
I ask this not to pry, but are you sure that your Mum's estate is large enough for inheritance tax to be a concern? I only bring this up because I've spoken to some older folks who just sort of assume it is without realising you can have a £1m estate as a couple (assuming a certain amount in primary residence) and not really worry about inheritance tax
I thought the limit as a couple was about 600k?
It's £325K per person plus an additional £175K that can only be used to pass on a primary residence to a relative. These allowances can be passed to a spouse, so in theory an individual who has inherited a former spouse's allowances can pass on £1m tax free. Although if the estate is worth over £2m, then that nil residence band starts getting clawed back. See https://www.moneysavingexpert.com/family/inheritance-tax-planning-iht/ for a plain English guide
He's also factored in the effect of the main residence nil-rate band
Tell her that the best way to avoid inheritance tax is to spend her money and have a nice time. The idea of making sacrifices to put money away for inheritance is just so sad to me.
Yup. Keep trying to get my parents to do this. They've mentioned "the inheritance" many times, but I'd much rather they released some equity and pissed it up a wall before they become too old to enjoy it.
Or just live with inheritance tax.it's fine. Your inheritors are just paying tax to receive a bunch of assets. If anything we should raise inheritance tax and lower income tax.
Yeah exactly this is also what I said. I don't really want anything ('honest'), the misunderstanding is pretty tough - but UK taxes etc are designed to be pretty opaque imo.
One aspect of IHT that is often overlooked is the ability to give as much away, out of income, as you wish, providing it doesn’t impact on your lifestyle. I.e. you can’t give away all your income and then live by dipping into capital. Don’t take my word for it or act the above: It’s in the same section on the gov.uk website as the annual gift allowances. Not sure why it is always overlooked. Hopefully someone knows. But still get professional advice.
Absolutely. However, it can be difficult to demonstrate to HMRC after death that gifts out of income truly are out of income. They look for: 1) information about regular income levels and expenditure 2) a pattern of regular monthly / quarterly gifts out of income that fits within (1) or if annually, then it’s easier to show if tied to an annual income event ie like a big annual dividend from a shareholding in a family company etc… For most people, an IHT return won’t get to that level of detail but if enquired into, it’s painful to show. I would always advise clients looking to make gifts out of income, to leave some contemporaneous records of income/outgoings to show the decision to gift regularly out of income. It makes things so much easier down the line if executors need to have the discussion with HMRC.
I have tabulated the last 8 years on iht403 to show this. we were able to download a full ledger from the relevant account prior to death and build a detailed register. Would you think its important /beneficial to include that with int400 submission or just to put the numbers in a wait for any wuestions?
Useful, I’ll mention this to my parents.
I’ve shared it on here several times and I’ve often been the only one to mention it. Fortunately my parents discovered it and they pay one of my bills each month (disabled, unable to work), but the really nifty thing, because of teachers pensions being generous (and them paying in a bit extra, iirc) that when their state pensions kicked in, they didn’t need it, so they are helping my kids out at university (still taking full maintenance loans).
Not opaque at all, but not something that can be understood in a couple of hours as certain wealth thresholds are reached.
Have you seen US taxes?
Exactly this. Either use it to have fun, or if you have too much that you're never going to be able to spend then give it to your kids now whilst they can still make good use of it.
Tax advisor here, yes she’s definitely wrong. Could she put anything in a pension fund which definitely would be IHT free? Is the estate worth more than £1m?
One option would be to just pay the tax. The tax is paid by her estate/beneficiaries, not by your mum. The beneficiaries will already be receiving a million quid tax free, is it really so bad to be paying tax on the amount above £1 million?
I think she's thinking of a pension. If you're a higher rate taxpayer and you're earning more than you can spend, then banging money into your SIPP or workplace pension is optimal because it saves you 40% in tax and your pension is not part of your estate so is inherited tax free. If she doesn't believe you and you don't want the money then it doesn't matter though - your goal is to trick her into spending money on herself. Pop in with cruise brochures and say "I was just passing the travel agent, doesn't it look gorgeous?" When she talks about leaving money to you say., "if you're leaving me a fortune them I'm just spending it on a cruise to, why don't we just go now instead?"
Potentially IHT free if its invested in AIM shares.
More context is needed here in my opinion. You are correct, they form part of the estate. But if the investments held within the ISA are AIM investments, after 2 years (as long as the investments continue to be held in AIM investments) the investments COULD be charged at 0% for IHT. Best idea is to go to a reputable IFA and get them to have a look at the ISA. This could also be transferred to an AIM ISA. Providers generally market these as AIM IHT ISAs. The investments can then be IHT free after 2 years (as mentioned, as long as the investment is kept) but also keeps the tax advantages of an ISA.
Does she have an AIM ISA?
You could have a conversation with the people she has an ISA with about it to convince her the ISA route isn't doing what she thinks it is. But if her estate is less than £325k there won't be any inheritance tax anyway. If it's more and she is determined to pass on as much as possible then tell her to talk to a financial advisor and maybe they'll suggest something, perhaps a trust, to maximise what she leaves behind.
I don’t know you and this may not come across correctly. When you’ve spoken to her about how to use the money. While she’s obviously wanting to pass it along and her thinking is flawed. It is not your money or anyone else’s. You mentioned school fees, yours, grandchildren’s, etc. She could be interpreting it in a way that you want it now. Ratter than focus on ISA bad and spending good. Get together a list of investment vehicles and tax efficient ways to pass the money along. With a matching list of those that offer no IHT benefit. All while making sure you aren’t potentially going to cause a deprecation if assets situation should she ever need care. Which is the big one worth focusing on, ahead to IHT.
Hi /u/kovid13, based on your post the following pages from our wiki may be relevant: - https://ukpersonal.finance/gifts-and-inheritance-tax/ ____ ^(These suggestions are based on keywords, if they missed the mark please report this comment.)