Sheila is in her late 70s and has recently inherited a considerable amount of money from her late husband. A lot has already been redirected to her children by a deed of variation but she is still concerned about her inheritance tax position. Can you advise her?
Sheila is in a comfortable position because of her pensions, which are index-linked. She feels that she has too many investments that involve considerable responsibility and has calculated that she wants to retain around £100,000 in cash for easy access
She has nearly £600,000 split between cash, National Savings certificates, insurance funds, Peps, Isas and shares. Taking her house into account, she has a potential inheritance tax liability of well over £250,000.
Making direct gifts is really the only efficient action to reduce this kind of tax bill, subject to the accumulation period. Her income position means that she can make very large gifts without any impact on her continued well-being.
She should consolidate her building society accounts, taking care that any which carry membership rights are retained. Reducing cash balances to around £100,000 will meet with her requirements.
The insurance funds are worth over £250,000 and should be fairly easy to deal with. A couple of the policies should simply be encashed. These are invested in direct equity funds and are not efficient. They are also relatively small so it makes sense to dispose of them and to pass the proceeds on to her son and daughter.
The rest are in with-profits policies and should be transferred to her daughter-in-law and daughter. They are sound investment funds and it would not be suitable to encash them at this time. They can be assigned by gift on a 50/50 basis by simple deeds.
This protects the policies and shifts the future tax liability to the assignees. The daughter-in-law is a basic rate taxpayer, so is a better assignee than her husband.
Most of the National Savings certificates should be assigned as well. These are all growth investments so do not actually do anything for her, other than increase her IHT liability. National Savings will provide transfer forms.
The rest of the portfolio is in Peps, Isas and other shares. Again, these could all usefully be transferred. The shares and unit trusts that are outside Peps and Isas are not the sort of investments that Sheila should be holding and should simply be transferred or sold. There is no problem with capital gains tax.
The Peps and Isas are a different kettle of fish because they have tax advantages. But the investments are all in stocks and shares, which are irrelevant in her circumstances. On the contrary, they will add to Sheila's IHT problems, as well as her administrative ones.
The only benefit is the tax-free income she can take from them but, as she does not draw any income and does not need to do so, she should transfer the assets. It would be possible to take the income from the accounts and give it away but this would be pointless.
If we accept that they are not actively benefiting her, then selling them and transferring the proceeds could bring a number of benefits. There are a few vehicles such as Isas and stakeholder pensions that her son and daughter could reinvest the money within, so that they could make use of the available tax breaks. This means that, even though she would be giving up tax benefits on her side (and one is generally loath to do these things), she can counteract the drawbacks by ensuring that the proceeds are used equally if not more efficiently by her children.
Having made suggestions as to how to reduce the size of her estate and, hopefully, her eventual IHT liability, there are other annual exemptions that are worth bearing in mind. The first is the annual exemption by which she can make gifts totalling £3,000 each year, free of tax.
She can also give away £250 each year to as many people as she likes – this is called the small gifts exemption. Given that she has quite a few grandchildren and great grandchildren, this is perhaps an exemption that she could put to good use.
Interestingly, there have been some recent comments about the likelihood of a radical change to the IHT rules. It seems likely that the nil-rate band could be increased quite considerably and this would benefit her.
However, any changes are unlikely to detract from the main problem that she has because of the size of her estate. These gifts will still make sense, therefore. The sooner they are effected, the better.