CGT / IHT and wasting assets

[roca1976]

Working though my mums estate / probate it is now very clear I need to start my financial planning to avoid paying the government any more than I need to before and after my death if I am survived by my wife and sons.

I am looking at assets that avoid CGT and potential IHT (if gifted before 7yrs)

Classic Bike / Car(s) - Advantage: owning, driving something special. Disadvantage: storage / ongoing costs / future value / can only sold in 1 lump unless multiple vehicles

Gold UK Coins - Advantage: Easy to store, can be released in part. Disadvantage: Gold prices are quite volatile.

Wasting Assets: watches, wine, whiskey, hand bags, shot guns. Mix of above advantage / disadvantages

Any other 'interesting' wasting assets, I believe anything mechanical can be considered (please no boats!)?

We will have Premium Bonds to avoid CGT however they can't be gifted if my wife and sons each have a full allocation.

[Simpo Two]

Fine Art is another one I think. But I wouldn't let the enthusiasm for reducing tax bugger up more reliable (ie normal) investment plans.

Plan B: Move to Alderney - no IHT there!

[OIC]

Reform will hopefully scrap IHT or at the very least increase the threshold significantly.

Which means that whoever is the Labour frontman / frontman woman in a few years will also be lying to the electorate about doing the same should they (God forbid) get re-elected.

Which means that the Conservatives will also have this in their manifesto.

But only Reform will actually make any changes.

Liberals (oxymoron) and Greens (far left lunatics & fervent Jew haters) will all propose increasing the number of comrades who pay it.

TL:DR - if Reform get a majority in 3ish years IHT won't be a concern for many, if any people. It's a particularly spiteful and inappropriate tax.

[OldSkoolRS]

roca1976 said:

We will have Premium Bonds to avoid CGT however they can't be gifted if my wife and sons each have a full allocation.

I can't help with any of the rest of it, but FYI you can leave a deceased person's PBs in for up to a year after their death. That would give your wife and son time to empty enough from their PBs to allow them to be gifted across? I only know this as it took over a year to get Probate on my Dad's estate and his PBs stayed active for the first 12 months after he died and the winnings were paid out when we eventually withdrew his funds.

[Panamax]

roca1976 said:

I am looking at assets that avoid CGT and potential IHT (if gifted before 7yrs)

For practical purposes any worthwhile assets you own (except your main home) will attract CGT. If you are able to make money by owning cars, which are usually exempt from CGT, you will be remarkably fortunate.

Any lifetime gifts will have IHT tapering away over 7 years. It doesn't matter what is given as the gift.

Owning a farm or business assets can suppress IHT.

Crucially, and this really is important, you never pay CGT and IHT at the same time. Old-timers are well advised to avoid realising assets which trigger a CGT liability because IHT is on its way...

roca1976 said:

We will have Premium Bonds to avoid CGT however they can't be gifted if my wife and sons each have a full allocation.

You'll almost certainly be losing money (after inflation) on Premium Bonds. You'd be better off holding something that will increase in value and pay a bit of CGT on that increase.

[trevalvole]

Panamax said:

Any lifetime gifts will have IHT tapering away over 7 years. It doesn't matter what is given as the gift.

This is widely quoted, but when I recently had cause to investigate what the rules actually were, I found:

"Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold."

https://www.gov.uk/inheritance-tax/gifts

[AyBee]

OIC said:

It's a particularly spiteful and inappropriate tax.

Except in many cases, it's the insane rise of property prices (i.e. unearned and untaxed wealth) that has got them into that situation...but this thread isn't about that.

Isn't the simple answer to decide what you'd like to do with it, do it and gift what you don't need now rather than wait? I'd get far more enjoyment seeing children into bigger houses, etc, than sitting on a large asset pile until I die.

[Jon39]

trevalvole said:

Panamax said:

Any lifetime gifts will have IHT tapering away over 7 years. It doesn't matter what is given as the gift.

This is widely quoted, but when I recently had cause to investigate what the rules actually were, I found:

"Taper relief only applies if the total value of gifts made in the 7 years before you die is over the £325,000 tax-free threshold."

https://www.gov.uk/inheritance-tax/gifts

Take an example of a £2 million estate.
Are you saying that a one off gift of £320,000 made 2 years before death, is free of inheritance tax and subsequently, a £325,000 tax free allowance is then applied to the £2 million?

There is a legitimate way of gifting, without the 7 year rule being applicable.
HMRC use the name, 'Gifts out of surplus income'.
The payments must be regular and you must have proof that it really is income, that is not required for normal expenditure.
There is no limit.

Say that you have a bank account that only receives state pensions and there are no withdrawals from that account.
That should be one simple proof of excess income being available.

Edited by Jon39 on Thursday 4th December 17:34

[roca1976]

Maybe I have misinterpreted the tapered gift rule when working out IHT.

I need to deduct gifts from the £375+£125k and any assets above the remaining value need to have 40% deducted?

[C69]

Jon39 said:

Take an example of a £2 million estate.
Are you saying that a one off gift of £320,000 made 2 years before death, is free of inheritance tax and subsequently, a £325,000 tax free allowance is then applied to the £2 million?

No, any gifts given in the three years before death are liable to IHT at 40%.

Gifts given in years four to seven before death might qualify for taper relief, but only if the total value of gifts given in the seven years before death exceeded the nil rate band of £325k.

[Techno9000]

roca1976 said:

Maybe I have misinterpreted the tapered gift rule when working out IHT.

I need to deduct gifts from the £375+£125k and any assets above the remaining value need to have 40% deducted?

IIRC any gifts (unless exempt) within seven years of the demise of the deceased need to be declared (added onto the value of the estate) at probate and if this takes the estate over the Nil Rate Band for the individual then tax will be due.
If tax is due then the rate of tax on each gift is assessed at the rate applicable on a sliding scale from 40% (if in the last three years before demise) down to 8% (if in the seventh year before demise).

All at this Gov.uk page . https://www.gov.uk/inheritance-tax/gifts#:~:text=a...

Edited by Techno9000 on Thursday 4th December 22:21

[Wombat3]

C69 said:

Jon39 said:

Take an example of a £2 million estate.
Are you saying that a one off gift of £320,000 made 2 years before death, is free of inheritance tax and subsequently, a £325,000 tax free allowance is then applied to the £2 million?

No, any gifts given in the three years before death are liable to IHT at 40%.

Gifts given in years four to seven before death might qualify for taper relief, but only if the total value of gifts given in the seven years before death exceeded the nil rate band of £325k.

This. The first £325K given within 7 years of death will eat the NRB (i.e. use it up). Anything given over and above that may be subject to taper relief if it was given between 3 & 7 years before death. The exact position changes as the gifts age & as some drop out of the 7 year window.

Another option worth exploring is a discounted gift trust. Depending on the discount a proportion will immediately drop out of the Estate & you can then also still receive an income (usually 5% p.a. of the initial investment I believe) for life . If done right the investment will grow at a rate that exceeds the annual withdrawal & the investment grows inside the trust.

If you survive say 10 years you'll have had half the initial cash back & the Trust should still be worth more than you put in it with the lot being outside your estate after 7 years. There are a couple wrinkles surrounding the usual 10 year assesment for trusts & a possible 6% tax charge for anything over £325K but its still cheaper than IHT.

From a generational perspective an option is also to leave your assets to a Trust rather than directly to children etc. The idea being that your children then borrow the money from a trust rather than adding it directly to their own estates. As such when they eventually die the trust can be repaid from their own accumulated assets (thereby reducing their own IHT ) and then the next generation gets access to borrow the same funds - rinse and repeat down the generations.

There would be IHT on your assets used to fund the trust initally, but not after that. Again even if periodic charges apply every 10 years, they are still a lot less than IHT.

IANAL !

[Panamax]

I anticipate OP needs trusts like a hole in the head.

The KISS principle is IMO a fundamental part of tax planning unless you're staring at many ££millions.
(Keep It Simple, Stupid)

[Wombat3]

Panamax said:

I anticipate OP needs trusts like a hole in the head.

The KISS principle is IMO a fundamental part of tax planning unless you're staring at many ££millions.
(Keep It Simple, Stupid)

Maybe, maybe not, he can doubtless investigate & decide for himself.

Of course if all he wants to do is deal with a situation where he dies & is survived by his Mrs then just leave the whole lot to her which she can then gift away as required (standard 7 year gift rules apply obvs.)

Edited by Wombat3 on Thursday 4th December 23:22

[Armitage.Shanks]

Wombat3 said:

From a generational perspective an option is also to leave your assets to a Trust rather than directly to children etc. The idea being that your children then borrow the money from a trust rather than adding it directly to their own estates. As such when they eventually die the trust can be repaid from their own accumulated assets (thereby reducing their own IHT ) and then the next generation gets access to borrow the same funds - rinse and repeat down the generations.

There would be IHT on your assets used to fund the trust initally, but not after that. Again even if periodic charges apply every 10 years, they are still a lot less than IHT.

Surely it's immaterial who you leave the money to if the value of the estate is above the IHT where the tax will be applied? I could understand it perhaps different if the estate needed to settle a debt/loan but the 'rinse and repeat' in a Trust sounds very much like one of those tax 'avoidance' schemes several celebrities got involved in and found out! I'd expect HMRC to be all over this. Much better to gift most of it away to the main beneficiaries especially after the first spouse death and hope you last another 7yrs.

[Wombat3]

Armitage.Shanks said:

Wombat3 said:

From a generational perspective an option is also to leave your assets to a Trust rather than directly to children etc. The idea being that your children then borrow the money from a trust rather than adding it directly to their own estates. As such when they eventually die the trust can be repaid from their own accumulated assets (thereby reducing their own IHT ) and then the next generation gets access to borrow the same funds - rinse and repeat down the generations.

There would be IHT on your assets used to fund the trust initally, but not after that. Again even if periodic charges apply every 10 years, they are still a lot less than IHT.

Surely it's immaterial who you leave the money to if the value of the estate is above the IHT where the tax will be applied? I could understand it perhaps different if the estate needed to settle a debt/loan but the 'rinse and repeat' in a Trust sounds very much like one of those tax 'avoidance' schemes several celebrities got involved in and found out! I'd expect HMRC to be all over this. Much better to gift most of it away to the main beneficiaries especially after the first spouse death and hope you last another 7yrs.

Of course IHT is levied on the estate of the initial settlor of the trust before the trust is then funded from what's left. The trust is an entity in its own right thereafter though & it survives long after the settlor. If a beneficiary borrows from it then they have a legitimate debt that can be repaid to the trust out of their own estate before that is evaluated for probate / IHT thus reducing the IHT liability on their estate.

Trusts are then taxed separately under well established rules.

When you gift someone money or assets directly from an estate then one of the other things it does is fatten up their estate - which will then be subject to IHT when they die. In essence, tax on money that's already been taxed.

One of the other benefits of placing the money into trust from an estate is that because its not a directly owned asset of the beneficiary it's also not attackable in the event of divorce etc.

What do you think the likes of the Duke of Westminster do? I suspect you will find that despite having access to billions he actually owns very little in his own right. If you have an estate worth more than the IHT allowances, it can be entirely sensible to play the same game.

Edited by Wombat3 on Thursday 4th December 23:21

[Armitage.Shanks]

So a Trust only offers protection to the first beneficiary in the trust after it has been established by whomever has died? It aint for example going to help me as IHT would be paid before it is set up if I don't get rid of it.

The size of my estate cannot compete with the likes of the Duke of Westminster who I can understand like other stately home and multiple London property owners will need some form of protection from tax but here as your 'average Joe' the costs and hassle of setting up a Trust is not for me.

[Wombat3]

Armitage.Shanks said:

So a Trust only offers protection to the first beneficiary in the trust after it has been established by whomever has died? It aint for example going to help me as IHT would be paid before it is set up if I don't get rid of it.

The size of my estate cannot compete with the likes of the Duke of Westminster who I can understand like other stately home and multiple London property owners will need some form of protection from tax but here as your 'average Joe' the costs and hassle of setting up a Trust is not for me.

Discounted gift trusts can get part the way there I think

The establishment of other trusts is about creating generational wealth & protecting your children & grandchildren's assets in the longer term.

Clearly it depends upon how much you are dealing with as to whether its worthwhile.

I'm no expert on this stuff but am currently researching it for further action. If you set the right vehicles up in the right way the costs do not appear to be too horrendous & most of it needs doing once only.

[ChocolateFrog]

OIC said:

Reform will hopefully scrap IHT or at the very least increase the threshold significantly.

Which means that whoever is the Labour frontman / frontman woman in a few years will also be lying to the electorate about doing the same should they (God forbid) get re-elected.

Which means that the Conservatives will also have this in their manifesto.

But only Reform will actually make any changes.

Liberals (oxymoron) and Greens (far left lunatics & fervent Jew haters) will all propose increasing the number of comrades who pay it.

TL:DR - if Reform get a majority in 3ish years IHT won't be a concern for many, if any people. It's a particularly spiteful and inappropriate tax.

You do realise IHT is totally irrelevant to the majority?

I couldn't give a fk about it.

I think the figure is about 4%.

[Panamax]

Wombat3 said:

I'm no expert on this stuff but am currently researching it for further action. If you set the right vehicles up in the right way the costs do not appear to be too horrendous & most of it needs doing once only.

I think that's optimistic. By all means go for it if you're the Duke of Westminster (or perhaps even the Duke of York) although I'm not sure what you have in mind when you say the costs are "not too horrendous".

For Mr & Mrs Average "trusts" are not IMO by any stretch the magic answer to every question.

In ball-park terms I'd see £1million as the bare minimum to start looking at trusts. Preferably more.

At the end of the day the concepts of "giving stuff away" and "keeping control of it" don't fit comfortably together, especially as the settlor gets older. Any trust that's put into the hands of professional advisers for day-to-day operation will end up costly to run. Immediate IHT at 20% going in (if over £325k), 10 year anniversary charges, professional fees, it all adds up. Yes, the advisers are always keen to sell this sort of thing. It's nice work if they can get it.

There isn't really a "doing it only once". The trust needs registration with HMRC, an annual update of that registration, proper accounts kept, annual tax returns filed. And then more professional advice will be required every time the Chancellor fiddles about with a budget.