Introduction
Last month my article was missed form the newsletter as I was on holiday. I did forget to write it until I got there and then did it on a sun lounger whilst having a few beers, just tapping away on my phone... The team took it upon themselves to remove it due to its drunken incoherent nature! But then you were just left with some AI produced drivel. Which we use to cover some important things off and so the bots that alert people to us can find it! Thanks to those that noticed and clamoured for the come back! The article I wrote for it is on ice and will be released one day!
So, we are going full Stevie this month and relating inheritance tax planning to the Beastie Boys song ‘Sabotage.’ Because they’re so obviously related. AI will never be able to make these connections!! Then, after that weakly analogous theme tune, we will look at ways to mitigate inheritance tax.
Beastie Boys, Sabotage (1994)
"Can't stand it, I know you planned it
I'm gonna set it straight, this Watergate
I can't stand rocking when I'm in here
'Cause your crystal ball ain't so crystal clear
So while you sit back and wonder why
I got this ****ing thorn in my side
Oh my God, it's a mirage
I'm tellin' y'all, it's a sabotage"
Art is all about interpretation and I am interpreting this as a rant against inheritance tax, even though this is not the official history and they are American so obviously their Estate Tax works entirely differently. Therefore, my interpretation is almost certainly wrong! But it’s my story and I am sticking with it…
Can't stand it, I know you planned it
Well they did! The government. They know that you’re less likely to do something about it as it only applies when you’re dead and most people act selfishly first - they look after themselves. And inheritance tax is something that they will ‘get around to’ at some point. But, when you need it, it’s too late! As you’ve popped your clogs. So the government has planned it, the question is, have you planned it? Probably not.
I'm gonna set it straight, this Watergate
Many people feel that the raid on their wealth when they’ve shuffled off is like the nighttime pilfering of documents from the Watergate hotel in the early 70s. When your darkness comes, they take some of the estate hoping no one will notice! Which of course, they do notice, but it’s too late by then.
I can't stand rocking when I'm in here
And so, you rock back and forth wondering whether you should I give it away, or have I got enough for me? You’re caught between the devil and the deep blue sea!
'Cause your crystal ball ain't so crystal clear
You wonder about the future. Will you be healthy and live a blessed life? You like to hope so. Will you face massive health problems that require large expenses to keep you comfortable?
You need to be absolutely sure that you’ve got enough money for your life! Have you planned for all eventualities in your unknown future? Have you planned for the unknown unknowns! Principally this may be illness, medical expenses or need for care and the £2k a week that can cost. That could very well do your inheritance tax planning for you!
So while you sit back and wonder why
You wonder why you tried so hard, worked for your family to help them, so you can bequeath something meaningful to them.
I got this ****ing thorn in my side:
Inheritance Tax, it grinds, doesn’t it? You’ve paid your dues, the income tax and National Insurance on earning it, the VAT, Council tax, , etc taxes to spend it just to live, and some of the Capital Gains tax, dividend taxes and interest taxes on your savings just to live in the future. Most people feel it is their money and it’s not fair that it is taxed again when they die. They want to leave it to the people they love.
Oh my God, it t’s a mirage
It only applies when you’re dead so why are you so worried about it! You’re gone. Roy Jenkins, the former Labour Chancellor said:
“Inheritance Tax is a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue"
He said that because you can gift money to heirs during their lifetime and as long as you live 7 years, you can eliminate the inheritance tax bill. The trust issue is that if you did that, you are relying on those people to gift you the money back, if you need it.
I'm tellin' y'all, it's a sabotage
One way or another, it’s sabotage. The government are sabotaging your quest to leave a meaningful financial legacy, and you are sabotaging your quest to do so by not taking action to avoid it.
Fight for the right to party – Beastie Boys
How are we going to fight for the right or our heirs to party, as the Beastie Boys urged? The battle lines are drawn so what can we do? Other articles in the month’s newsletter review some options, here is a brief list and then we will look at my favourite, fighting as a family!
Spending it
You’ve got one life (as far as we know), so make it as good a one as you can. Use your money to hang around with the people you love most and bring joy to you. For grandparents, take the whole family on holiday. Your grandchildren will remember this for the rest of their lives, long after you have gone.
Having been to Disney Land in Tokyo in the last month, I can absolutely guarantee that if you took at the family there, they would never forget it. Here’s some pictures! I don’t look very happy but that’s because it was an accidental photo. I can’t work technology. I won’t tell you my age as it’s fun to work it out based on the equation that shows age based on number of chins.
When you are 85 and can’t get out the house much, you won’t be remembering the toys, socks, or chocolates you were given as presents. You’ll remember the relationships, the people you met, the people you love and the people you produced! Spend the money on those things before it’s taxed to oblivion.
Give it away – Regular exemptions
Everyone can give away £3,000 a year and it is immediately exempt from inheritance tax. There are other exemptions for gifts on marriage to children / grandchildren, small gifts, etc that can also be used. This helps stop the inheritance tax bill growing.
Give it away – larger sums
When you know how much money you need for the rest of your life and added plenty of contingency, anything left over you can afford to give away. After 7 years, it will be outside your estate for inheritance tax. Obviously, the earlier you do this the more likely it is you will live 7 years.
From a lifestyle point of view, surely it’s better to give with a warm hand than a cold dead one? Surely your children need it more when they are 30-40 rather than in their 60s themselves. Surely, you would prefer to see the benefit of them having it, as cremation urns don’t have windows for you to see it…
Charity – if there is no one you would want to give money to, why not a charity? There are plenty of people that need it, and you can see the benefit of that money on them. You can set up your own charity if you like!
Give it to Trust - You can give £325k every 7 years to a trust with no immediate tax charge. You give to trust so you can maintain some control over when the beneficiaries receive it. But it does mean some extra administration, you may have periodic tax charges depending on what you do with the money in the trust and the amount you gift to it too.
Invest in investments that get Business Relief or Agricultural Property relief
Doing this means money is exempt after only 2 years. These are good options for those starting inheritance tax planning in later life that are less likely to last the 7 years needed for a gift. But they tend to earn less money than normal investments and also are not guaranteed. There are also limits on the amount you can invest and may need an update to Will to direct elsewhere other than your spouse if you’re married. Again, depending on the amount invested in them.
Insure the bill
You could say that you won’t change anything, except start paying a premium for a life insurance to cover the cost of the inheritance tax bill when you die. Your ability to do this will depend on your health and if you can get cover. Also, you must ensure you get the right insurance! For example, a term assurance for 10 years is no good if you live 11 years…
Earning more with investments
Do you want to reduce inheritance tax? Or do you simply want to leave as much as possible to your heirs regardless of the tax. Paying attention to both is important. IF you have more money than you need, you could increase the risk on your investments to have a higher equity content which is more likely to get a higher return and therefore leave a larger sum, after tax, as your legacy.
Combining the above
There is generally no silver bullet to inheritance tax and combining a number of the tactics above could be suitable for you. For example, I am particularly fond of:
Your Family VS HMRC
HMRC’s job is to get enough money from us to fund the government and the services we need. Which, I think is a noble job as it benefits us all. But, to do so, they have enacted a number of taxes. It’s not possible to legally avoid all taxes, but there are things that are in place to encourage us to behave in a way they would like. This might be higher taxes on things they want to deter, e.g. buy to let property investment in the last 10 years, or lower taxes or incentives to encourage investment in certain areas for example Business Relief.
What we cannot do is win every battle. So we should choose our skirmishes carefully! With pensions being introduced to inheritance tax regime from April 2027, the below examines what I think will become a common scenario.
A married couple with the below assets that intend to leave their home to their children.
- Funds in Pension - £800,000
- Main residence Property £1 million
- No other assets worth mentioning and no previous gifts
Until April 2027, if they died there would be no inheritance tax as £325k of nil rate band (the amount we can all leave inheritance tax free) for each of them plus £175k each of main residence nil rate band totals £1million and pensions are currently exempt.
From April 2027 – pensions are included so potentially £800k of taxable estate which would be £320,000 in inheritance tax.
They don’t want to withdraw money from the pension and go into higher rate income tax and pay 40% on it.
But what about this! Their children are both higher rate taxpayers. But having a large mortgage and raising children is expensive. Despite their higher earnings they don’t have money to save or invest. The situation is clear:
- The parents have the money and the large potential inheritance tax bills.
- The children have the tax allowances (Pension annual allowance, ISA, etc) but not the money to take advantage of them.
- The parents could withdraw money from their pension and pay 40% income tax.
- They could gift to their children who could then fund their pensions and claim back – 40% tax.
Result: The battle for income tax with HMRC is declared a draw.
Result: The family have potentially reduced inheritance tax, assuming survival of 7 years and so are the overall winners!
This is just one small example of how a family could get together to run their money better as a whole, rather than each person acting for themselves.
How we can help:
We have an inheritance tax planning report that we are doing for people to help understand the solutions that would be most suitable to their financial situation and also how to implement it.
Until next time dear friend, continue to fight for the right to party. Whatever your party looks like, do more of it.
Disclaimer: This article does not constitute financial advice. We recommend that you speak to a qualified financial planner for advice tailored to your individual circumstances and goals. Financial markets may go up or down, and you are not guaranteed a return on your investment. Past performance is not necessarily a guide to future performance.
