I know we have to wait a few weeks to see whether the horror change in the last Budget are implemented. I expect they all will be.
We should not rush into making changes to our affairs for a little while, until we know these surprising, disturbing changes will be implemented.
It will lead to, in my view, a far greater focus on our severe need to reduce our Inheritance Tax liability.
One of the long-standing ways to reduce our Inheritance Tax liability is to give money away out of our normal expenditure which does not reduce our living standards. I will expand on this further shortly.
The gifts on this basis are outside your Estate immediately and there is no seven-year wait such as for an outright gift being a Potentially Exempt Transfer. HMRC is bound to scrutinise whether the gifts were from your surplus income and truly qualify for the normal expenditure out of income exemption, under the Inheritance Tax rules. Here are some of the points to consider: –
- the payments must be regular
- they must be funded entirely out of income and not capital withdrawals such as withdrawals from International UK Investment Bonds
- they must leave you with sufficient income to maintain your normal standard of living
- if your surplus income is demonstrably sufficient to fund your regular gifts or perhaps premiums into a Whole Life policy or for example annual regular investments into an International Investment Bond then they may well qualify for these immediate Inheritance Tax savings.
HMRC may well question: –
- the source of funds; are they truly from your taxable income
- consistency; have you established a pattern of using surplus income on a regular basis
- where HMRC determines that withdrawals are derived from capital or even partly derived from capital the exemption may not apply.
It will be important to demonstrate that the taxable surplus income exceeds the regular gifts for all the premiums to a Whole Life policy or regular lump sums to for example an International Investment Bond in trust for your children or straight regular gifts.
This leads me onto the horror of our pension funds being liable to Inheritance Tax on death. If we are not drawing income from our pension schemes right now and have enough taxable income to meet our immediate and future requirements, it will make sense to withdraw money each year from our pension funds on a regular basis and use this surplus income to give money away, perhaps such that children can invest in tax efficient investments, fund Whole Life policy premiums, funding regular gifts into International Investment Bonds and there are other opportunities.
If we simply leave money in a pension fund and do not withdraw it the pot gets bigger and so does the Inheritance Tax liability. At least withdrawing money from our pension funds although liable to Income Tax by taking money out we are saving Inheritance Tax of 40% not only on the money taken out but on the future growth of that money had it been left in our pension fund.
New ways of reducing Inheritance Tax will appear in the next few months which is now necessary.
Trevor Downing FPMI FPFS
