Transcript

SUMMARY KEYWORDS

new IHT rules, pension impact, inheritance tax, unmarried couples, 60% tax trap, financial planning, life insurance, discounted gift scheme, business relief, estate planning, tax exemptions, inheritance tax consultation, pension strategies, financial security, inheritance tax liability

SPEAKERS

Scott Gallacher, Martin Stanley

 

Scott Gallacher  00:00

Thank you for joining us this evening, and apologies for the slight technical delay. My name is Scott Gallacher,I am a Chartered Financial Planner with Rowley Turton IFA limited, the title of today’s webinar is How the newIHT rules will hurt your pension and your loved ones, and more importantly, perhaps, six ways to solve the problem, presented by myself and the main speaker will be Martin Stanley, who I’ll introduce you to in a moment. Quick agenda, housekeeping, which we want to do very quickly, introduction. And then we’re going to look at what’s changed. What’s the impact of the new IHT rules. We’re going to discuss the hidden 60% taxtrap, or 60% IHT trap, which will affect people who have saved over £2 million pounds, how unmarried couples are disproportionately affected, six actionable solutions and how they might benefit some of you. So we’ve gone through a very quick example about the IHT inheritance tax, people could save money by implementing those strategies, some or all of them, how Rowley Turton can help, and then some questions.There is time for questions and answers at the end, if anyone has a question. We will just do the housekeeping. The good news is your microphones are muted and your cameras are turned off, so it’s a webinar, not a zoom conference meeting. So you hopefully can hear us and see us, but we can’t hear or see you. If you want to raise a question during the presentation, please put it on the chat function or the questions& answers function, either is fine. A recording of this webinar will be sent to all attendees, so some people are interested and can’t attend, but they will get a copy by email in a couple of days, along with a copy of the slides. If you experience any technical difficulties, please let me know in the chat. And finally, we will cover this at the end, but if you email martin@rowleyturton.com, you’ll receive a free copy of the Enough book, which we will discuss later. Thank you for joining us today. A few quick caveats. You read this at your leisure, but in essence, what we’re talking about is proposals to the IHT and pension rules. It is currently a consultation. So what we’re still talking about today is our view of what those rules are, and it’s pretty documented what they are, but what they should be, or what they will be. And there are still some quirks to iron out. It’s still two years away, and those rules may change. So even if our interpretation of them today is fully correct, that might not be the rules introduced, but I still think it’s wise to assume that those rules will come in place, as the government have told us they will, and then to plan accordingly. We don’t necessarily need to make any action today, but it’s good idea to be looking at it just in case, because there are some things that we, perhapsfor certain clients, should be doing now, but for other clients it is a case of just being informed and therefore aware. So this is me on the left and Martin on the right, and I will introduce you to Martin now to present the seminar.

 

Martin Stanley  02:54

Thank you, Scott, for that. Good evening, everybody. Well, this is the latest in a series of webinars that we’ve done on topics which will typically interest our clients and to introduce us to potential clients. Some of those are on general information, and some of them are prompted by events and news. And this is one of those, because this all arises from the Chancellor’s speech, the first Labour budget in a long time, which tells us all about new tax raising measures by the government. Now, we’re not going to cover all of those today. We’re just focusing on one particular thing, which is pensions. On screen, it says what the basic message is, which is that, up to now, your pension is certainly subject to income tax, some of it inheritance tax. Up to now, it’s been inheritance tax free, which was a great movement, but from 2027 the idea is it’s now going to be subject to inheritance tax, just like the house, ISAs, all your other assets. As Scott said, this is technically a consultation, but in reality, we don’t expect the main things to differ greatly from what the government’s announced, so some of the detail might change, but not the main aspect. So what is the impact? Here’s our example, Janet and John. This may not be you, but that is sort of still a typical family, and we’ll look at some other scenarios in a minute. But for the time being Janet and John, they’re married. They have two children. They’re doing okay in life. Their assets are held jointly, and when theypass away, the normal thing is that they leave everything to each other, and then on the second death, leave it to their children. And what have they got? Well, they have a house with £650,000 in savings, investments of some form or another worth £350,000, and a pension worth £500,000 so overall, they’ve got one and a half million pounds in assets, which is not too unusual for a couple doing well in life as they’re getting into their 40s, 50s, 60s, so they’re married with children. The reason that’s particularly important, by the way I should say the eagle eyed amongst you will have noticed that the top two figures add up to a million pounds exactly,so we’ll come back to that, it is relevant. So the reason it’s relevant that they’re married with children is to do with inheritance tax allowances. You are allowed a certain amount of wealth before inheritance tax comes in. Those allowances are £325,000 per person, plus also an extra allowance of £175,000 which is given to you if you leave your own home to your children or grandchildren. So that gives you £500,000 pound each. And in addition to that, you’re allowed to pass anything at all to your spouse or civil partner without any inheritance tax at all. That means that the second person to die can get both lots of allowances. And so when we talk about a million pound allowance for a married couple, that is what we’re talking about. So a million pound is tax free, and over that we start paying tax. So that just demonstrates there that one million pound covers nicely the £650,000 house and the £350,000 of savings. There it is, and at the bottom, the £500,000 is sitting on its own because it’s exempt, no tax on pensions at the moment. So let’s kill these lovely people off and see what happens. So the rules are as they are today. There are be no changes yet. For the first person to die, there’s no IHT, because, as I said a moment ago, everything passes to the partner, the husband and wife completely tax free. This is always the case if you’re married, assuming that you pass everything to your spouse or civil partner. So for those of you in that position, it’s only on the second death that you need to think about it, I say assuming that things do pass to the partner. Because often in blended families, whether a second marriage is in different children, it can be a little more complex. But in this situation, Janet and John no inheritance tax to pay you. So we’re still in today’s rules. The second death – Well, there’s no inheritance tax at all, because £650,000 and £350,000 add up to a million. That’s the exempt amount. The pension at the bottom, no tax to pay because it’s exempt. It’s a pension. Pensions are special. However, now let’s fast forward to April 2027 so we’re on the first death again. There’s no tax to pay, because everything passes to the spouse, whichever one of them died first, everything is left to the other, so there’s nothing to pay. However, now we come on to the change. So we’ve still got a million pound allowance, but we got one and a half million pounds subject to tax, and that because the pension now counts. That pension counting means tax of 200,000 pounds, which is 40% that’s the rate on the £500,000 over the allowance. Now important thing to say is that you might think that, well, the million covers the house and the savings and the pension pays a tax, but no, what you actually do is you cover, you look at the whole amount, and then the tax is proportioned between them. So we can see here that the House and the savings, they’re taxed at £133,333 and the pension has £66,667 so the tax is split between them. It’s important to know that all tax actually received. Oh, we just go what’s received by the children. So the house is the house. So that’s not going to change, but the savings are going to suffer the inheritance tax on the estate by which I need a house and the savings, and then the pension is down to £433,000. Couple of just things go on to that. Couple of things says, Why is this bad? Well, paying more tax than you might like to pay. That’s one thing. Nobody likes to pay more tax than they need to. The other thing is potential delays a principle of inheritances and principle of probate, which the process the end of life is that you’ve got to settle with a tax man before anything else happens, before inheritance could be received. So somebody, in this case, has got to come from the pension, and somebody’s got to come from the rest of the estate, and that’s all got to be organized. Now we don’t know all of the details on quite how that’s going to be achieved, especially with regard extracting the tax bill from the pension, but we think there’s quite a lot of scope for delays to kick in there, so that is a concern, but we’re going to move on to who is most effective. But if you’re affected, you might already know. But just to think about it, individuals with significant pensions or estates. Well, that’s quite obvious. Also, I earlier mentioned blended families. It’s quite easy, the Janet and John example, everything goes to the husband or wife and then to the children, but some families more complicated  than that, that can introduce complexities, and that’s something we can talk to people about, unmarried couples, especially. And I said before that, a key thing about marriage was that you can pass things on. First death, everything goes the other person. There’s no tax at that point, only on the second event. But for unmarried couples, that doesn’t apply and that can have consequences. We’ll see a little bit later on. Another thing, it’s just a failure of planning, really. Families who haven’t placed life assurances policies in trust, these little assurance policy that pays out on your death, you don’t want that to all be paid into your bank account when you die, and then you’ve got more money to tax. There are better ways to do that. And lastly, of course, those without proper estate planning. I hope that doesn’t mean you, but if it does mean you, then speak to well somebody can help you with that. So the hidden 60% tax trap, it’s this is quite nasty. Some of you might have been aware this, and some not. Now, this isn’t something that’s new, but because pensions are newly going to be involved in inheritance this might bump some of you up into this nasty band. Now explain how it works. I mentioned before that your normal personal inheritance tax exemption is £325,000, and you get an extra £175,000 if you leave your own home to the children. Well, that’s great, and that all adds up for two people to a million pounds. But for those people with what’s called large estates, and that means over £2 million, that £175,000 addition is whittled away. It’s reduced, and after a little while, it goes to nothing at all. What that means is that between £2,000,000 and £2,700,000, that extra exemption is goes down and down and down and down and down, down down on a sliding scale, just as an example, if you have £2 million, and then you get an extra one pound, they were over the £2 million, that one pound will, of course, pay 40% inheritance tax. We know that, but also that one pound will reduce a little chunk of your extra allowance, so you’ll lose that allowance, and that will mean that that pound will ultimately pay 60% tax. Now this is in the band between £2,000,00 and £2,700,000. It’s not new, but your pension might have suddenly bumped you into this band, so you might not have been aware of it before. So that’s something to think about. So I said a little while ago that we’re going to talk about another example. Not Jonathan, John, the traditional 2.4 children, married couple. This is Adam and Sophia. They’re an unmarried couple. They’re long term couple. They haven’t got any children yet, and all the assets in this case, we’re in Sofia’s name. Perhaps she’s a young professional, or perhaps she’s the daughter of one of our clients and has received generous contributions from family, perhaps and other wills, just like Jonathan John before us, leave everything to each other, and they would expect and would want everything to the other in the event anything happen. So what have they got? They’ve got a house, they got £25,000 savings, and they got a pension. I say Adam, this is all in her name, in actual fact. Now again, eagle eyed amongst you will notice a £300,000 house and a £25,000 savings adds up to the £325,000 allowance. Remember that she’s only got an allowance for £325,000 she hadn’t got the addition, which you only get for passing your house to your children, because you haven’t got children. So £525,000 pounds, so if the worst were to happen, let’s kill her off. Well, the £325,000 is no inheritance tax, because that fits neatly, as if we planned it that way, into her allowance and the £200,000 pension. No, it’s a pension. So no tax to pay today, but in April 2027, there is tax pay. Suddenly, she’s got £525,000 pounds. She’s well over the allowance, and she had to pay £80,000 inheritance tax. Or rather, she doesn’t, but Adam does after her death now, just again, is his proportion between the two. So the pension pays £30,000 and a bit more in tax. Well, we understand there’s going to be a system for the pension company to pay that. Okay, that’s going to reduce the pension, and that’s not good, but nevertheless, that’s okay. But look above the house, and the cash is going to be taxed at £49,000. So just moving on. Think, hold on, if we got to pay £49,000 in inheritance tax, where does it come from? There’s only £25,000 that in cash. He doesn’t want to sell the house, so we’re £24,000 pounds short So you don’t want to sell the house. So where does Adam get this money from now? Remember what I said? You can’t inherit until everything’s settled with a tax man. That’s the first step in the process. So Adam’s going to have to find that £24,000 somewhere, he’s actually going to have to borrow it, or he’s going to have to do it with own savings. By some means or another, he’s going to have to find that money, or ultimately, I suppose, he might have to sell the house if there’s no other solution. So not a great solution for Adam there. So moving on. So we’ve looked at Adam and Sophia. We looked at Janet and John. They both got different problems, but fundamentally, the problem for both of them is that what didn’t usually taxable, the pension, is now going to be taxable. So there’s a few ways to to address this, and we’re going to go through them one by one. So next slide please. As Chris Whitty would say, before we go on to that fundamental inherent tax is that if you haven’t got it, then it’s not there to be taxed, so you might spend it during your lifetime. And we often come across clients who are perhaps being a little bit too frugal, and we say, Well, look, you could be living a richer, better life. Spend some more money. Don’t save it all for the kids. Now you can’t just squander money, because ultimately you end up with assets to show for it. If you buy stuff that stuff itself is taxed, but you can give money away. I’ll explain that in a minute. Thing to bear in mind, though, is that when you give money away, I’m going to talk about in a minute, gifting money, significant amounts of money, sometimes to trust sort of children. Once you give money away, generally you can’t get it back. This is important thing to remember, because this goes to the heart of financial planning, which is your own financial security. That’s one thing to say. The other thing to say is that, generally speaking, if you give money away, there’s a seven year clock, you can’t give it away in your on your dying breath, because that’s what everybody will do. So instead, if you give it away and you die within seven years, they count it back in to the calculation, and you’re still taxed on it. So spending it or giving away is is one idea, but The next thing is making use of gifting allowances. Now, everybody, no matter what. Can give away £3,000 per year as a one-off allowance, and there’s no inheritance tax to consider amount at all. And you can also make small gifts up to £250 to anyone you like, nieces, nephews, grandchildren, etc. There are some other small gifts on marriage and civil partnership and those kind of things. I won’t go into those now, but there are some some smaller allowances there. They’re not really significant, but you might well make use of them. Something which is coming more and more to four, though, is the second half of the slide, their normal expenditure out of regular income. This means, if you have spare income, and it’s got to be income, it can’t just be money drawn from capital in the bank, but if it’s genuinely income, and you give it away at a regular basis, and you’re not leaving yourself short that’s important to say, then it’s immediately exempt from inheritance tax. And that is to say there’s no seven year sliding scale on this. So if you have extra income, or you can generate extra income, that’s quite a good way of getting money from yourself to children or perhaps grandchildren, in a really tax efficient way. So that’s something you really give thought to. One way to do that might be able to generate extra income. Perhaps I might take more money from my pension, seeing as a pension has put me in this difficult position, or perhaps worsen that position. So if you’re 55 or older, so you’re able to take your pension. You might commence or increase your pension withdrawals. You probably already know that you can take a quarter of your pension a tax free lump sum at tax free income tax. So you can take a lump sum, then perhaps it might be worthwhile giving that away to another part of the family. But also, if you take income now, you suffer income tax on that, of course. But once you’ve done that, and the net income is yours, you might perhaps say, Well, under the normal expenditure out of income exemption, which I mentioned a minute ago, I can take it and there’ll be excess, a giveaway to the next generation, or perhaps a trust of their benefit, and there’s no inheritance tax implication on that at all. So that’s a quite a valuable exemption, which I think is going to come for more and more. And we’re talking to clients about a lot now, the third thing I mentioned right at the beginning, which is, if you have a life insurance policy, the last thing you want is for that money just to pay into your estate. And then, hey, you’ve got a bigger amount of money to be taxed. So the thing you want to do there to put it into a trust so when you die, that’s held aside the benefit to the people who have to settle your inheritance tax bill. And that’s something which you can do if you have policies, life insurance policies that aren’t in trust. I would urge you to look at that. Ask us to look at it for you, because that’s a really simple thing, which you should be doing, but business owners and directors, because these people have more control normally, over the life insurance plans in their own companies, you should be reviewing death in service schemes. Death in Service schemes, having company life insurance plans. Now you might not know, but often what you think is just a life insurance plan is actually underneath. Built on pension regulations, and it gives various simplicities and exemptions. But now this is our thinking. At the moment, those plans are going to suffer inheritance tax, just in the same way as a pot of money. Up to now, we’ve been talking about money in pension pots, not about pension incomes or annuities or things like that, but this is something else again. So third thing, which is Life Assurance, which is actually a pension money. And so you might suddenly find, well, if I got, typically, three or four times salary as a life insurance from my company, that might be hit for inheritance tax as well. So that’s something to think about. The third thing is, we’ve talked up to now on this last Fauci webinar about, how do you reduce your inheritance tax bill? How do you make that tax bill less well, it’s not an either or thing, but there’s another thing to consider, which is you might not be able to reduce your inheritance tax bill down to nothing. I think not many people can without really jeopardizing their own security, giving everything away. So instead, life insurance can simply accept what I’m going to pay some tax, but I’ll have a life insurance policies that when time comes, the money is magically there to pay the tax, and that settles things nicely. It’s not a solution that works for everybody, but if you’re in good health, it’s something to think about. The last thing on this slide is just remember I mentioned before a really important point. You’ve got to settle the tax demand for anything else can be done. Bear in mind that pensions and death in service benefits are you a company life insurance teams that might be pension based, they might not be available until you’ve done everything else and paid the tax man his due so it’s sort of like a circle. You can’t get at the money until you’ve had the money, and you can’t have the money till you get at the money. And so that’s another reason why life assurance, where the money is magically there straight away, can really come in handy. So just remember Adam and Sophia, by the way, just on that very point. Well, Adam’s dilemma, where does he find this extra 24 and a half 1000 pound from wouldn’t it be great if Adam and Sophia had thought, Well, look, just in case the worst happens, let’s do a little life insurance policy. And this wouldn’t have cost them very much at all. They could have done a little life insurance policy. But if the worst happened, would pay the tax bill and Adam would not need to worry about a thing. Adam could have come to us for that, and we’d have helped him. So a couple of other ways to reduce your tax bill. Remember, I said that if you give monies away, significant monies, then you can’t get them back at all. You can’t ask for them back. It’s a one it’s a one time deal. I also said that if you give money to waivers a seven year sliding scale before the tax is gone, a discounted gift scheme is a kind of variation which you can put money into, and that money might be, for example, money you’ve already got in isas or savings funds or investments, or it could be a 25% portion of your pension which you take out. You might choose to put that into a discounted gift scheme. Now, I won’t go over all the details of this, but simply, it’s a kind of trust. The trust is where you give money away now, but the recipients don’t get it till later. In the meantime, this trust is special, because not only is a portion of it exempt from day one, don’t have to wait at seven years, so a third or a half, typically, depending on circumstances, it’s exempt straight away, and only the rest after seven years. But also it’s a really good thing. It makes it a little like a pension in nature. It gives you a regular income year after year, the rest of your life. Normally, trusts. Don’t do this. You can never have anything back, but this kind of trust, you can. And so it’s a halfway house. You’re giving the money away. You know, you can’t get the capital back ever again that you accept that, but you get regular income, and you hopefully, you save up your hair, open tax, you live for seven years. Another option, something which really can help clients with, is business relief. Now this is a type of agreement where certain shares are exempt from inheritance tax after two years of owning them. This is different, because you’re not giving anything away here. You’re just keeping your own money, but you’re putting it into a special kind of shares. They tend to be shares a little bit more risky than standard stock market shares, but not always. You are limited in the amount you can take advantage of this, normally up to a million pounds. There are special ways that really certainly have access to whereby we can bring the risk down. So it’s a fairly complicated area, but the key thing is, you can keep the money in your own name, and it provides either full exemption inherent in tax after two years or 50% there are also available options whereby you can for an extra cost, effectively make it free of tax immediately. That’s usually helps with people who are in their later years and suddenly think. Gosh, I’ve got this lump of money if I live two years. Well, will I? I don’t know. And so for an extra cost, okay, this lump of money, up to a million pounds, is exempt, straight away. Now, this is something we can talk to you about. It’s quite specialist, but the options are there, the important thing, and just as an example of that, let’s go back to Jonathan. John, oh, I think I’ve missed one pay more into a pension. Now you might be running away with the idea that we hate pensions. Suddenly, no, we don’t, not at all. Pensions are fabulous things. The problem is is pensions are designed to provide income in your retirement. That’s where they’re designed for. That’s why you they’re subsidised by by the UK Government. You get the tax back into it, and if you build your pension with a view to using in retirement, it’s fabulous. You get tax free growth, just like in an ISA. There’s no capital gain tax or income tax. If you’re unlucky enough to die for before age 75 it comes back, all completely free of income tax. The company you put in you get you get tax back. If you’re hiring taxpayer, you get 40% or even 45% tax back on it. You can put up to £60,000 per annum in, so much better than an ISA, and they remain a tax efficient tool even after April 2027 but the one thing I would say pensions now, the balance has shifted a little bit. It’s no longer good for a general savings plan to save inheriting tax. What they are brilliant for is a saving for your own retirement to provide your income. They’re really, really good. So remember Janet and John? I just want to go back to them with a couple of the ideas we’ve spoken about, what we might have done with them. So remember that now the pensions are going to be taxable. Suddenly, there’s about one and a half million pound and both parts the house and the savings pay some money, and the pension also pays a lot of tax. Well, how could we have used some of the strategies we’ve just discussed to save inheritance tax, okay, so the house remains the house. There’s not a lot you can do really with houses, and you’ve got to live in after all the next one now for even £50,000  ahead of a piggy bank that’s taking a picture of a factory. And that sort of represents this idea of putting that money into the share arrangement that I mentioned, whereby, after two years, the money is exempt from inheritance tax. The money still yours. You’ve not given it away. That’s a key advantage. But it’s free of inheritance tax. Then at the bottom, look that £500,000 changing to only £375,000 in the pension and £125,000 somewhere else. Well, that’s somewhere else is the discounted gift trust. I mentioned that arrangement whereby you put money into a trust for the future generation. You can’t have the capital back, but you get that regular income every month. And so what achieves that £350,000 is exempt, and that £125,000 is also exempt, so suddenly the tax is a lot less. You’ve still got a bit of tax to pay, six and a bit thousand pounds on the house, and six three and a bit thousand pounds on the pension. But look, those two bits in the middle saved £190,000 pounds. Now this is all broad brush stuff, and what’s appropriate for one person won’t be appropriate for another person. So this is just an example of what might be achieved, but I hope it shows you that there really are things you can do. It’s not doom and gloom. Rachel reads isn’t going to come in, swoop in, and take all of your money, but you do need to do some planning and really checking can help you with that. So conclusion, the changes will affect an awful lot of people, most of our clients, and even those people who, up to now, haven’t really had a narrative tax problem, might suddenly find actually I have, because that pension, you know, it put me into that bracket. Unmarried couples are particularly vulnerable because they don’t have some of the allowances that married couples do, and that’s something that’s been controversial for quite a long time, and all sorts of ways. The third thing again, is this point about delays and difficulties in settling the process. You might not be able to access pension funds or other assets until you pay the inheritance tax. It hasn’t happened so much in recent years. That used to be the case that people would take a special take a special loan from the bank to pay the tax in order to release the rest of the estate that might be coming back. If you’ve already got inheritance tax planning in place, such as life assurance plans, you might need to revisit that just to pay the new higher bill. But we think that with our planning, most of our clients will be able to fund the IHG or reduce the IHT or sometimes sidestep IHG entirely. And also that’s why, despite the change in 2027 which is the whole point of this webinar, pensions remain a really, really good tool for. Retirement planning and estate planning, so don’t give up on your pension checks yet. So how can we help? Well, first thing is to help you understand your overall liability and how it all works together today, as being a broad brush, sort of the general principles, but your individual situation may very well be different, especially if you’re unmarried or you’ve got some blended family that’s not that simple. Jonathan, John, example, we can help you with financial planning to strike a balance between the tax strategy we discussed and vitally importantly, your own personal financial security. We can’t run away with the idea that we want to save all the inheritance tax and do lots and lots of planning and leave you with vulnerability in your later years. We also work in conjunction with some other experts in this field, accountants and solicitors come into inheritance tax planning more than some other kinds of financial planning. So we’ve got some really good colleagues who we work with, and the bottom are fundamental aim in almost all what we do on a day to day basis here in the office Scott and myself is to ensure you enjoy a comfortable retirement without the fear of running out of money. So helping you enjoy your wealth, that’s the tagline of the square there. That’s what we can do for you. So that brings us to the end of my webinar about inheritance tax and how pensions have changed it. We always mention this on our webinars. If you’ve seen this before, you’ll know this is a book called enough, how much money do you need for the rest of your life? And this sets out a sort of a refreshing take on how you should approach your financial planning, and how we can help you approach financial planning in order to live the life that you want, rather than get involved too much in sort of numbers and planning. It’s a broad brush, sort of, what do you need to do the rest of your life to maximize your your lifetime? So anybody would like a copy of that, it’s free. Booking the paperback. We can pop it in the post to you. So drop me an email, Martin at Rowley, token.com with your postal address. It doesn’t come through email. It’s a book, and I will send you a copy. And a lot of our clients think it really inspirational, really interesting. So that brings us to the end, questions and answers. Scott’s going to rejoin me. Hopefully we can both answer your question. But do bear in mind that we don’t know everything yet. Some of it is still to be decided, but we’ll do what we can. So first question is from John, with regard to the probate catch-22 I think this is the he, what he’s referring to here is the fact that you’ve got to settle with a tax plan before you can actually inherit anything. With regard to the probate catch-22 can the IHT, attributable to a house be spread over a 10 year period, albeit subject to interest? Scott?

 

Scott Gallacher  32:14

I believe. So I think, I think the answer to that question in John is yes, I’d have to treble check it, but yeah, my understanding is, and I don’t think anything’s going to change. I think our point certainly in that Adam and Sophia example, is more the practicalities of whether people want to be dealing with that and the simplicity of having the money to pay the inheritance tax and obviously distributed estate cleanly. But yeah, again, of course, if it’s if it’s over assets, you know, property, not property assets, necessarily, but say, business assets and sort of you generally want the situation where a your inheritance tax bill is as low as it can be legally, obviously, and we where you can’t eradicate it entirely. You want the money available to settle it where possible. I think, you know, really won’t be involved into tax on something, all that stuff out after event. And also, some people won’t, well, they just won’t want the hassle really, fundamentally. And then the final question from John, our contributions not necessarily regular to charities subject to seven year old. Good question. Nope, they’re not anything you give to

 

Martin Stanley  33:44

charities are immediately exempt and not submit to the seven year rule. So another question from Sheila here, she’s asked, so does inheritance tax on pensions replace income tax? And the answer is, there no afraid, not income when you draw your pension, you probably know you can take a quarter of it tax free, which is great. You can do that what you will invest it or gift it. The other 75% is subject to income tax when you draw it. Now, if you die, that passes on to whoever you’ve nominated, and they would normally pay income tax at their own rate, and so on and so forth. The only exception to that is if you’re unlucky enough to die before age 75 which I hope none of you will, then the next generation or the spouse can inherit the pension without paying any income tax at all. So that’s a saving, but it doesn’t replace income tax. So what might happen is you would pay the pension if you died with a pot of money with past the next generation, in the example of Janet and John, the £200,000 pot would go to the Janet in this example, they would deduct inheritance tax from that so 40% let’s say, and then the balance would still be a pension. And. When drawn that would still suffer Janet’s income tax rate. It’s

 

Scott Gallacher  35:04

worth mentioning on that point. This is one of the few advantages of the new rules, or not vanity rules as such, but how it’s been on who pays the tax, shall we say? So on the pension side, one of the reasons that the IHT on attributable to pension is actually intended to be paid by the pension scheme rather than the rest of your estate. Is that effectively that means, as Martin said, if you die for saying five and your family going to inherit your pension fund, and it will pay income tax on it. The fact that the inheritance tax on the pension element is taken from the pension bot means that that pension is reduced, and therefore your income tax charge is reduced, income tax rate. However, if we go back to that Janet, John example, we see at the start we had a million pound that was exempt because allowances and half a million pound pension, it was exempt. And in simple terms, I might say, Well, hang on, the reason that my inheritance tax bill is now 200,000 pounds is because I’ve got half a million pound pension. Logically, that that’s the bit that’s the bit that’s making my inheritance tax, rather than worse, which it kind of is. But it’s only because of the change in the rules. Surely it can have the whole of that £200,000 paid from the pension, which, if I’m going to pay income tax on my kids are going to pay income tax on the money coming out of it after my death, after saying five would be the best way. But because it’s this prorata principle with, I think it was £66,000 image, John example, coming off the pension. £133,000 coming off the balance of the estate. That doesn’t quite work that way. So, yes, it’s good that it’s pro rock whether some of the tax comes off the pension. But it’s not as simple as saying, Ah, the rest of my state is okay, and my pension gets it for the whole 40% which would be cleaner and more tax efficient from our perspective. So there are some issues with that. In that sense, got

 

Martin Stanley  36:47

another question here from Ian, who said, I currently pay half of each of my daughter’s mortgages. So that’s that’s great. Thanks, Dad, approximately £500 each from my expenditure. Is this COVID Under normal expenditure of income? So yes, Ian might very well be what’s the normal expense you have income regulations say is that if you give to somebody on these three criteria, it must be genuinely from your income, so not just drawn from a capital sum in the bank. Let’s say it must be on a regular basis or a pattern, so monthly or quarterly or even annually, and thirdly, the giving of it must not diminish your own standard of living. It mustn’t leave you short. So as long as you meet those three requirements, then yes, that money you pay out every month towards the mortgages will fall under the normal expenditure of income rules, and that means it’s immediately exempt from inheritance tax. There isn’t a seven year waiting period. It is important to say, though, that when you make gifts of this sort, it’s really important to record it really scrupulously. And in fact, the revenue make available form that you can do that on. And Ian, if you email me after this, I’ll provide that for you, just so you make sure that you’re doing that in the right way, which ultimately, hopefully many years from now, your executives will need

 

Scott Gallacher  38:03

I just have one additional point on that. Whilst we talked about income, it’s important to make clear it doesn’t have to be entirely taxable income. That’s true. If you’ve got money saying isas, which a lot of our clients have, you might have half a million pound in ISAs, if you’ve been doing ices and peps previously, back in the day, and that might be generating what £20,000 a year income reinvested in the ice. And you might not see it in terms of your own bank account, but it is effectively income. So there is an element in that sense, that you might have an extra if you had a half a million pound pension pot that, sorry, ISA pot, you might have an extra  £20,000 a year that you don’t even realise that you can be gifting tax-free. And so I think a lot of this is going to prompt us to be much more diligent with inheritance tax planning. Previously, with the giant John example, we could do relatively straightforward inheritance tax planning by use of the pension, and let’s say below a million. That was very good, very efficient for clients. We’re having to kind of dust off the kind of pre-2015 kind of textbooks as well, and revisit IHT planning proper to make sure that we’re kind of delivering for our clients. So that’s an issue. Last

 

Martin Stanley  39:10

question here at the moment is Mohammed, who says some of us have adult kids. EG, has one child on 40% income tax near the  other on 45%, so both doing. Well, can you talk to the double tax impacting their kids

 

Scott Gallacher  39:25

when I show you what you mean by if you’re talking about the pensions? And yes, so we mentioned this scenario with John, and John, then they’ve got this pension of half a million pounds. They both die. They’re half a million pound pension less the £66,000 tax passes to the children, so £433,000 split between two children, we assume in a scenario, then they would then pay income tax at 40 or 45% on receiving that money. So yes, they’re not getting 60% of that pop. In a sense, they’re getting less because they’ve paid some inheritance tax or bit the split on the estate is also awkward, as I mentioned earlier. Lot, and then you pay income tax as well. Just

 

Martin Stanley  40:02

coming to mention that, suppose that doesn’t mean that when they inherit the pension, they pay that income that’s all in one go. It’s as they choose to draw monies from the pension which they’ve now inherit, depending

 

Scott Gallacher  40:11

what they inherit. Of course, because there is a point depends on some pensions would automatically pay out as well. So between the two, depends on, again, this is incredibly complicated with trying to make a estimate or guess about people’s situations, and pensions are the one thing I hate to say, Oh yes, it’s this, or it’s that, because every pension almost is different, and everyone’s circumstances are different. On the other point about the just to clarify on the gifting, if we’re talking about gifting to children, and whether that has a tax issue, no, because if we’re making regular gifts out of your income, just point to clarify that the children don’t pay income tax on receiving that. That’s right. Just make sure. So again, we said Ian, where he was paying me towards his mortgages for his children. Yeah, that’s why Mr. Vander, that isn’t income for the children, so they don’t pay any simply gifts from dad. Yeah. So, so that’s fine. I think that’s all the questions, I think

 

Martin Stanley  40:59

questions for now. So the last slide says, Thank you, and I repeat that, thank you very much. And lastly, just in case, there are our details, we here at Leicester. We’re in business park. Bottom says, book a meeting, contact us. We’ll be delighted. Speak to any of you about inheritance tax planning, pension planning, or any other financial planning subject. You can contact us with a no commitment sort of first meeting. We have people in here in the boardroom to sit down cup of coffee and a biscuit to go over things, and we’d be delighted if you were amongst those people. We’re always glad to hear from you. So please get in touch. I think that’s everything for today. So thank you very much. We will be doing the webinars again. We tend to do this about every quarter or there about so next time an email pops into your email box, please take notes, and it might be something else of interest for you now. Thank you very much. And good night. Thank you.