Case study - planning with pensions in an IHT world Q&A

Q: Why are we including income tax on the full inherited pension balance in legacy calculations. I understand the rationale re 20% and not 40% but the boys may hold on to pension funds if in ill health or for future reule changes?

A: We actually assumed the pension death benefits would come out at 20% - could be the boys, could be the grandkids , could be change in circumstances etc etc. So we were trying to get a potential best case / could be worse.

Q: If she is Balance Risk leaning towards Cautious Risk, The ISA AIM Portfolio is in the wrong risk category.

A: You are correct that Tina's risk profile that did not match that of the AIM ISA. The ISA was inherited from her husband and nothing had been done in terms of reviewing it. Risk profile was one of the main factors in why we thought Tina should transfer to an ISA that was more appropriate for her objectives.

Q: A big part of planning would include her ATR although no reference to this. Was there a general ATR for this client?

A: Tina had a balanced risk profile but had a slightly cautious leaning.

Q: Is the gift to the boys not exempt if AIM assets?

A: The gift of the AIM shares is not exempt because the shares were sold within 7 years of the gift being made. In this scenario that means the gift became a potential exempt transfer and will form part of Tina's IHT calculation until 7 years has passed.

Q: Since the sons are both higher rate taxpayers, why are you assuming Income Tax at basic rate in the calculation?

A: While the son's are currently higher rate taxpayers, our assumption was that they would become basic rate taxpayers in retirement so could delay drawing on the pensions until that point. We also thought it would be better to underestimate the tax payable by taking no action. If they did access the inherited pensions and were higher rate taxpayers then obviously more income tax would be charged.

Q: Wouldn't the invested funds suffer tax consequences upon death?

A: No, the regular premium investment would also be outside of the estate. In our scenario, the regular premiums are either gifted into trust, or gifted to her children who would then subsequently invest.

Q: Insure v invest? The insurance will be in Trust. The regular premium investment would just make the IHT position worse??

A: No, the regular premium investment would also be outside of the estate. In our scenario, the regular premiums are either gifted into trust, or gifted to her children who would then subsequently invest.

Q: but the life insurance would be put in trust to be outside the estate and shouldnt the equivalent savings be put in trust otherwise the savings pot would exacerbate the IHT, surely

A: Correct, in our scenario, the regular premiums are either gifted into trust, or gifted to the children who would then subsequently invest.

Q: Loan trust v BR graphs presumably assume 5%pa loan repayment?

A: No loan repayment is assumed. Loan repayments that were spent or loans waived would have increased the IHT efficiency of our plan.

Q: For insurance vs investing the premium, could Tina not take a higher income and use gifts out of excess income? I assume physically using the income from state pension (a clear audit trail) is better than using monies from pension drawdown

A: Yes, this is true and can be a potential strategy.

Q: Should Tina's member drawdown of be less than £37700 if all to be at BRT, to allow for her taxable state pension?

A: We have assumed the state pension uses the personal allowance, so the pension withdrawals can use the entire basic rate band of £37,700.

Q: you haven't mentioned offshore bonds. What is the reason for this?

A: No particular reason, we just chose to use onshore bonds in this example. But you are right in stating an offshore bond could be better for certain clients.

Q: with regard to doing the 325K trust for the client's planning, had she not used part of her nil rate band 4 years ago?

A: No, the gift of AIM shares was a PET to the children. This gift would only use the NRB if she died within 7 years of the PET.

Q: What about transferring property to sons, generating income from assets & paying a market rent to sons to live in home (obviously issues if sons went bankrupt or divorced, plus the rent would be taxable income to them). Worth consideration?

A: This type of planning is very complex as you have to follow the rules to the letter of the law. There are lots of cases where HMRC have deemed this arrangement to be within the Gift with Reservation rules.

Separately, as you pointed out there are other risks to consider with gifting the main residence, and you do also lose out on certain tax benefits (e.g. use of RNRB and potentially CGT uplift on death).

Therefore, we think the best course of action for dealing with the IHT on a property is an insurance policy. Anything else is extremely complex and has the potential to create unintended consequences.

Q: Will you produce a follow up to the case study for your recommendation please?

A: Not planning to no

Q: Is there a specific software package you use to achieve the outcomes you are demonstrating ? Thank you.

A: Microsoft Excel! We do all our modelling on Excel.

Q: Have you considered inflation risks? It feels like these annuities don't have any inflation protection.

A: The annuity for protection was being used to meet a specific need i.e. maximise income to maximise premium for the WofL sum assured. The inflation proofing of the annuity was a retirement income decision and we weren't concentrating on that aspect. If Tina needed a guaranteed inflation proofed income then it would just have shifted the analysis a little.

Q: Would it be possible to lay out as a table the various 'age crossover' points on the charts (eg. Protect v Lump Sum at 91) etc, so we can see the relevant range of ages for where which benefits are better?

A: That's a bit too much work but think the graphs show the crossover. The case study just flushes out the things we think need to be considered - everyone's crossover points are different.

Q: I thought there was a £200K gift, wouldn't it make the gift to the gift trust chargeable at 20% IHT ?

A: They were PETs so ignored on entry and on death if they become chargeable the TRNB would be in play so OK

Q: Do you have any ideas on what may change if Tina was younger so had more time pre 75 when the pensions may be passed on death

A: The numbers would change but I think the theory would be broadly the same and probably get to the same place roughly

Q: I missed the fixed income percentage you built into the DGT. Please? Thank you

A: There wasn’t a DGT?

Q: You assume 3% as a growth rate for BR investments - it is actually closer to 4.5-5% with new enhanced BR investments. How doe that change your analysis.

A: The crossover point would move to the right, but then an offshore bond instead of an onshore bond would move it back to the left! That's just the numbers though - there are the other points to consider and the trade offs to be made. There are lots of risks and trade offs so in general we don't really think it is worth accepting lots of risks on money you clearly will never need - so access is not a real benefit.

Q: What if Tina was over 75, as was her husband when he died? Are pensions better to then access and pay income tax?

A: Her husband died pre 75 that's why she had a tax free ension pot. The answer to the latter part is perhaps!

Q: Instead of a G20 annuity, use a G0 annuity using the increased income to fund a 20 year FIB under trust for the beneficiaries.

A: Perhaps!

Q: I was a bit confused about the annuity still forming part of the estate for IHT

A: The annuity had a guarantee period

Q: But - if she makes 2 CLTs - she only has one £325,000 the TNRB only comes in at death - no? so the second trust is chargeable at 20%?

A: The 2nd trust was a loan trust and there is no transfer of value with a loan trust

Q: No Charity Gifting on death mentioned to reduce IHT - The kids will inherit enough

A: Nope, and it is an option

Q: the fact the client has lost substantially on her AIM investment (initially advised to reduced IHT in the first place ) she may take some convincing ploughing further funds into alternative IHT plans ?

A: Perhaps but hopefuly she could be brought to realise it was an investment issue not an IHT plan issue! She can have IHT plan in a fund she is already in and is comfortable with.

Q: Do you anticipate there being any limits on the size of gifts out of excess income? Would HMRC have an issue with a gift of 10k per month?

A: There is no mention of a limit in the tax manual regarding this exemption. So in theory, there is nothing stopping a very high earner from gifting surplus income.

Whether HMRC tighten the rules on this exemption in the future is something we cannot predict.

Q: Can a Whole of Life policy be funded out of a drawdown pot (rather than an annuity) pension pot and the premiums still be classed as regular gifts out of surplus income?

A: Yes it could, with one eye on obviously the ability to sustain premiums until death. If you were certain of the maintenance of premiums then it might well be a better option.

Q: Where you have settled £325k into a gift trust and are also using NEOI into a trust, the exemption is only agreed on death by HMRC. Are the NEOI payments treated as CLTs in the interim?

A: There are two schools of thought 1) you only report chargeable transfers, you think they are exempt so no reporting and deal with it on death or 2) trustees report on the IHT 100 so find out prior to death. 2 seems to be the sensible route if large sums are involved.

Q: But you can take PCLS and gift as a lump sum and can be classed as gifting out of income right ?

A: No, but if you take it frequently enough for normal accountancy practice to suggest it is income then it could be, we don’t think lump sums tick that box.

Q: Could loan repayment for loan trust be used for NEOOI

A: We believe that would be capital

Q: Can you give examples of case law for rapid depletion of income?

A: No, never seen one. If you find one let us know.

Q: Surely drawdown is regarded as income as it's processed through PAYE

A: No, the taxation of a payment does not dictate whether it is income for the NEOOI exemption. It is determined for each year in accordance with normal accountancy rules.

Q: Hi Les, if you dont cover this off in the webinar... could you confirm if PCLS can be gifted under section 21 gifting? if so what sort of period would you need to do this over for HMRC to deem it "regular"? the guidance is very woolly. ty

A: Our understanding is that PCLS does count as income for the purposes of the normal expenditure out of income exemption. HMRC say that there is no set time span to create a pattern of gifting but a reasonable span would normally be three to four years.

Q: If Sippholder passes pre 75 and spouse beneficiary doesnt require any of the benefits, could she channel proceeds to children & receive not only full IT relief, but also full immed IHT relief via regular gifts excess income exemption?

A: Yes, its our understanding that income drawn from a tax free beneficiary drawdown pot would qualify as income for the purposes of the normal expenditure out of income exemption.

Q: 75yr old, BRT married £400k SIPP which is surplus to needs, left to 2 kids both HRT. Plan to gift PCLS mthly over 1yr as Gifts of normal expend. Compliance rejected as HMRC paper says 3-4 yrs needed to use this rule. What is view on this?

A: HMRC state in their guidance that there is no set time span to create a pattern of gifting but a reasonable span would normally be three to four years. I agree that gifts made over the course of only 1 year would be unlikely to qualify.

Q: Non PCLS fund withdrawals/income is treated as income for gifting out of regular income- is regular PCLS withdrawals?? And over what time scale with HMRC expect to see a pattern of gifting???

A: Our view is that PCLS does count as income for the purposes of the normal expenditure out of income exemption. HMRC say that there is no set time span to create a pattern of gifting but a reasonable span would normally be three to four years. That relies on the amounts withdrawn to be at such a rate that they were deemed income and not the rapid depletion of capital.

Q: Gifting from normal expenditure could be problematic if the client regularly has supplemented monthly income over extended period from ISA/IA would this be deemed Capital Dividend income being gifted how that is deemed for HMRC now/at death

A: For this exemption, it is really important to remember that only natural income (dividends/interest) qualify as income. Regular withdrawals from a ISA or GIA will be treated as capital withdrawals, meaning they are ineligible for this exemption. Separately, using capital to meet your expenditure, whilst then gifting away your actual income would fall foul of the rules. So we recommend reading the detail on this exemption before undertaking any planning for clients, as there are loads of pitfalls.

Q: can you use drawdown income to qualify for gifts out of excess income as a recent seminar at Pump chambers suggested that it doesn't?

A: There are differing views in the industry on this. The majority of experts believe that withdrawals from drawdown can be considered as income, meaning they have the potential to qualify under this exemption. However, there are some experts who think pension withdrawals are a return of capital, which is what I suspect the speaker at your webinar was stating.

As HMRC have not published anything, we don't know for definite. I suspect we will need to wait for a court case before we have a definitive answer.

Q: How about something between a lump sum gift and regular gifting. e.g. drawing £100k p.a. from the beneficiary drawdown for surplus income and gifting this each year for the next 5 years or so until it's depleted? Sons then invest tax effic.

A: This is a valid point. But again, we don't know whether depleting the pension fund this rapidly would definitely be accepted by HMRC as surplus income. There was a recent tribunal case where the judge said 3 years was an acceptable pattern, to make things "normal" so one could assume that it could work. But our view is that HMRC could potentially look at large pension withdrawals in a relatively short period of time as capital and not income. Making the point that the gifts were normal moot as the gift was not out of income.

Q: given current higher annuity rates, would there be a case to move some of a drawdown pot into a taxable annuity stream and then use this as the excess income to gift per IHTA 84 s21?

A: Annuitising could be considered if the aim is to make regular gifts out of surplus income. You should probably model it out to see how much better or worse off each option would make your client and their family if death were to occur at different times. You would also need to factor in what the gifts were being used for, whether there was a guarantee period or value protection on the annuity.

Q: In regards to annuitise to fund WOL to cover IHT, how does 'back to back' arrangements impact this and when would this planning become ineffective?

A: It is the "associated operations" rules which I believe you are referring to. As long as the life policy and annuity are issued on the same terms as they would have been had they been purchased individually the "associated operations" rules do not come into play More detail can be found here. https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm20375

Q: Any thoughts on uncrystallised pension pot regarding TFC withdrawal or drip feed drawdown (red money)

A: We believe there are may grey areas when it comes to NEOOI. It is a viable option. For tax free money or low tax money it may well be simpler, clearer and less risky (as you are not relying on an exemtion claimed at death and having the evidence to prove it) then a single withdrawal and a lump sum gift, perhaps with a 7 year term assurance might be a good solution.

Q: Use of FIC a viable option?

A: Perhaps

Q: Please can you recap on the IHT rules for second marriages after becoming widowed. Thank you.

A: We suspect you are referring to the abilty to use multipelk nil rate bands - so see here - https://www.mandg.com/wealth/adviser-services/tech-matters/iht-and-estate-planning/nil-rate-bands/transferable-nil-rate-band-planning#the-role-of-discretionary-will-trusts

Q: When will the legislation receive final royal assent, and when will we have the final rules?

A: The legislation got royal assent last month. The finer detailed regs on scheme pays and pension scheme witholding notices will be a while as they are yet to be issued for consultation which we hope to be soon.

Q: Once an annuity is taken is the capital completely outside of the estate immediately? Just the Income forms part of the estate? Also if a guarantee is taken is there any IHT on the residual payments due after death?

A: The capital is immediately out of the estate but we believ if this happens while the member is in ill health then HMRC may treat it as a tranasfer of value. The incme is nto part of the esate all that shodl eb in the esate is the value of any guarantee payments yet to be made or the value of any value protection lump sums.

Q: Please could you explain your understanding of how the IHT paid from unused pension funds (post 75 and post April 2027) impacts the income tax that beneficiaries will need to pay?

A: Broadly, if:
- the pension scheme pays the IHT - any benefits that leave are just taxed under normal pension death benefit tax rules
- the pension scheme does not pay the IHT i.e. the beneficiary or PRs pay it then the beneficiary gets to reduce their taxable pension income by the amount of the IHT. As an example if they got a £10,000 payment that was fuly taxed then had IHT of £4,000 they would only pay inocme tax as if they received £6,000.

Q: if a beneficiary drawdown is passed to sons post 75 but into their pensions (not as a lump sum) if they die before 75 and pass on to their successor beneficiaries will that be passed free of income tax (ie washed through)?

A: Yes, the tax treatment of death benefits for abeneficiary is based on the age the person they inherited the pension from dies not when the original beneficiary dies.

Q: Who is responsible for paying the IHT on the pension and how does this interact with the probate process.

A: The personal representatives are responsible for paying any IHT due on the estate and the pension. However, once it is known who the beneficiary is that will benefit from a pension death benefit, they become jointly liable for the IHT due on that death benefit. In the same way as happens now, the deceased's IHT liability will need to be paid prior to probate being granted.

Q: What's the latest on the transfer of a pension when in ill health? Will there still be a transfer of value when the pension is included in the estate for IHT anyway? Thanks, Craig

A: That is one point of clarification to be received especially where the transfer happens pre April 27 but death is after. In principle post April 27 this issue should go away as your pension will always be in your estate and if your transfer does not reduce your estate then there should be no transfer of value.

Q: Individual relief now £2.5m plus £325,000 so accrue cash in own business and die with it as an ongoing concern?

A: While a trading business may qualify for business relief, it doesn't mean that all assets in the business will be eligible. Its only assets that are required for business purposes that will get the relief. So if you have a large surplus of cash which isn't required for use in the business HMRC can deny relief to that amount on the basis that it is an "excepted asset". Any IHT strategy involving a client's business should be discussed with their accountant. https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm25351

Q: This may be covered during your talk, but if not, could you please explain how, post April 27, post 75 income tax on beneficiary drawdown will be relieved on pots already subjected to IHT

A: Broadly, if:
- the pension scheme pays the IHT - any benefits that leave are just taxed under normal pension death benefit tax rules
- the pension scheme does not pay the IHT i.e. the beneficiary or PRs pay it then the beneficiary gets to reduce their taxable pension income by the amount of the IHT. As an example if they got a £10,000 payment that was fully taxed then had IHT of £4,000 they would only pay income tax as if they received £6,000.

Q: Have there been any further advances with the potential concession on the 'double taxation' issue? ie Income Tax by beneficiaries on Pension funds already hit by IHT.

A: There is no concession - you will pay IHT on your pension and the balance will get income tax. If you have paid income tax and then there is an IHT liability you will get to reduce your pension income by the amount of IHT paid.

Q: So the RNRB is apportioned, as well as the NRB?

A: Yes. While you need to meet various criteria to be eligible for the RNRB, if you qualify it is just applied as a nil rate band against the estate so is apportioned between the various components of the estate. The RNRB is not specifically used against the qualifying residence.

Q: Are pensions definitely going to be a separate category for calculating IHT?

A: We believe they will fall into the general estate and have there share of the IHT liability of the general estate allocated to them.

Q: will you have to apportion nil rate allowances between non pension and pension benefits post 2027. Will it possible to allocate all allowance to non pension for a death after age 75

A: No, you can't choose which assets to offset. The nil rate bands will be proportioned between the different components of the estate to calculate how much IHT is attributable to each.

Q: Why doe RNRB get set against pension assets which have no property or QRI within it?

A: While you need to meet various criteria to be eligible for the RNRB, if you qualify it is just applied as a nil rate band against the estate so is apportioned between the various components of the estate. The RNRB is not specifically used against the qualifying residence.

Q: Could you instruct a pension administrator to pay an IHT bill before probate? In a similar way that is allowed with some BPR products?

A: The IHT payable on the pension will need to be paid before probate can be granted. If you are referring to whether a direct payments scheme will exist to allow funds in the pension scheme to be used to pay the IHT due the answer is yes however you need to remember that it can only be used to pay the IHT attributable to the pension, not the rest of the estate.

Q: How can the RNRB be used in the proportion of NRB's to assign to the pension on the IHT calc. Does the RNRB not have to be for the property and therefore only a portion of the NRB available to go against the pension for IHT calculating?

A: While you need to meet various criteria to be eligible for the RNRB, if you qualify it is just applied as a nil rate band against the estate so is apportioned between the various components of the estate. The RNRB is not specifically used against the qualifying residence.

Q: If you use pension funds to pay an IHT liability through scheme pays, will this also be liable to income tax?

A: Where the member dies post 75, the death benefit is subject to income tax. This will continue to be the case post April 2027 so the remaining pension after IHT has been paid will be subject to income tax.

Q: Les has referenced the income tax liability in determining the overall tax liability - can he elaborate please as I'm obviously missing something

A: As well as IHT on death there is also income tax on death for benefits post 75

Q: Is it correct that the IHT paid, is set as a credit agains the income tax due?

A: Broadly, if:
- the pension scheme pays the IHT - any benefits that leave are just taxed under normal pension death benefit tax rules
- the pension scheme does not pay the IHT i.e. the beneficiary or PRs pay it then the beneficiary gets to reduce their taxable pension income by the amount of the IHT. As an example if they got a £10,000 payment that was fully taxed then had IHT of £4,000 they would only pay income tax as if they received £6,000.

Q: As any payments under an annuity guarantee period will be subject to IHT, do we know how this will work if the provider continues with monthly payments for the remainder of the guarantee term rather than making a lump sum payment?

A: Our understanding is that the IHT due will need to be paid as normal i.e. within 6 months of the end of the month in which the death occurred. Guarantee Periods must continue to be paid as income. This is a pre existing issue for those with guarantee periods in their estate.

Q: How will guaranteed annuity payments be treated for IHT post April 27? e.g jt life, 20yr gtee, both die by year 5, will the 15 remaining years of payments go to the estate and be subject to IHT if there are no named beneficiaries?

A: Yes, payments paid under guaranteed periods will be taken into account for calculating IHT on an estate.

Q: With a couple where their respective assets inc' pensions exceed the IHT allow's, would it be useful to designate some pension assets on death up to the IHT allowance to children as beneficiary dwdn thereby that grwth o/s survivors estate

A: It is definitely worth considering whether to make use of nil rate band on first death or passing assets to a spouse under the inter-spouse exemption, especially if the assets are just going to sit in the spouse's estate and grow at a faster rate than the nil rate band.

Q: Income tax post 75 still only applies if the sons take it as a one off right? With good planning this could be mitigated?

A: Where the member dies post 75, the death benefit is subject to income tax whether it is drawn as a lump sum or income. The way to mitigate the income tax on a pension on death is to take it out of the pension during the member's lifetime. The tax position of the member versus their beneficiaries would need to be considered to evaluate if there is a benefit to extracting the pension versus leaving it. You can mitigate the beneficiary post 75 by ensuring they qualify for drawdown so the benefits can be withdrawn over time.

Q: Is an annuity guarantee considered part of estate if paid?

A: Yes.

Q: Ho wis the probate value of the annuity calculated?

A: HMRC have a calculator available which you can use to calculate the value of any guaranteed period payable under an annuity. https://assets.publishing.service.gov.uk/media/5a82ffe040f0b6230269d918/guaranteed-annuity-calc.pdf

Q: could you write annuity guarantees into trust?

A: Our understanding is that while guarantee payments could end up in a trust under the Will, they can't be written under trust to a void a transfer of value on death.

Q: If the client purchases an annuity with a guarantee, payment period does this still remain within the estate for IHT purposes

A: Yes. HMRC have a calculator available which you can use to calculate the value of any guaranteed period payable under an annuity. https://assets.publishing.service.gov.uk/media/5a82ffe040f0b6230269d918/guaranteed-annuity-calc.pdf

Q: could you touch on how you work out the probate value of an annuity purchase?

A: HMRC have a calculator available which you can use to calculate the value of any guaranteed period payable under an annuity. https://assets.publishing.service.gov.uk/media/5a82ffe040f0b6230269d918/guaranteed-annuity-calc.pdf

Q: How do you obtain a 'Probate Value' on an Annuity, or is this provided when applying / underwriting?

A: HMRC have a calculator available which you can use to calculate the value of any guaranteed period payable under an annuity. https://assets.publishing.service.gov.uk/media/5a82ffe040f0b6230269d918/guaranteed-annuity-calc.pdf

Q: HMRC had a programmed PDF document that helped calculate IHT on annuity guarantee payments. Has this ever been updated?

A: HMRC have a calculator available which you can use to calculate the value of any guaranteed period payable under an annuity. https://assets.publishing.service.gov.uk/media/5a82ffe040f0b6230269d918/guaranteed-annuity-calc.pdf Not sure when it was last updated.

Q: if powers of attorney sell family home to fund mothers nursing home fees (father already passed) can they still claim RNB on mothers death for the full £350k

A: Potentially yes. There are downsizing provisions which exist for exactly this type of situation. There are three main conditions which must be met to qualify for the downsizing addition.

• The sale of the property must have happened on or after 8 July 2015
• The former home would have qualified for the RNRB if they'd kept it till they died
• Their direct descendants inherit assets to the value of the RNRB on death

Q: How do you calculate IHT liability in regard to annuities?

A: HMRC have a calculator available which you can use to calculate the value of any guaranteed period payable under an annuity. https://assets.publishing.service.gov.uk/media/5a82ffe040f0b6230269d918/guaranteed-annuity-calc.pdf

Q: How is the probate value calculated on the Annuity?

A: HMRC have a calculator available which you can use to calculate the value of any guaranteed period payable under an annuity. https://assets.publishing.service.gov.uk/media/5a82ffe040f0b6230269d918/guaranteed-annuity-calc.pdf

Q: Does BR asset count towards Estate for calculating RNRB, even if held for over 2 yrs?

A: Yes, the full value of the BR asset is always counted as part of the estate, meaning it can taper the RNRB. You could consider gifting the BR shares after 2 years into a trust in order to take the asset out of the calculation for the RNRB.

Q: My understanding is pru fund growth within a bond would have nothing to pay at the 10 year piont?

A: Are you referring to the 10 year periodic charge? If you use a bond with PruFund in a discretionary trust then there could be a 10 year charge. The value of the trust and its available NRB dictate if there are charges not the investments.

Q: With BR asset, what are the tax implications for a beneficiary who then sells the asset once they've inherited it?

A: So for CGT, there should be very little or none, as the CGT uplift at death would eliminate most of the original gain. As for IHT, selling the asset would mean the recipient no longer owns BR assets, which could worsen their IHT position in the future. But it's important to remember that if the recipient is relatively young, then the inherited BR investment may not be appropriate for them, so this type of decision shouldn't always be driven by tax.

Q: What date is considered the date of the gift given? Is it the date the paperwork starts, or the date the gift comes into the possession of the receiver? I'm thinking of property, which sometimes takes a while to transfer.

A: This is a bit of a grey area. As explained in the recording, it could be the date the settlor loses access to the funds. It is unlikely that this will ever be an issue, but if it does arise, then you may wish to seek specialist tax advice.

Q: Would you implement the loan trust at least one day before the discretionary gift trust, so to reduce future periodic and exit charges on the gift trust? I.e. Rysaffe Principle

A: This is correct. When combining loan trusts with other gifting, it is important to do it in the right order to try and mitigate the impact of future periodic charges on the discretionary trust. So the order of gifting should be > 1. Loan Trust / 2. Chargeable Lifetime Transfer (CLT) and 3. Potentially Exempt Transfers (PET). And if there are multiple CLTs (e.g. you're doing a gift trust (discretionary) and a discounted gift trust (discretionary), do the one with the smaller CLT value first.

Q: is the order of trusts Loan Trust first then gift trust

A: When combining loan trusts with other gifting, it is important to do it in the right order to try and mitigate the impact of future periodic charges on the discretionary trust. So the order of gifting should be > 1. Loan Trust / 2. Chargeable Lifetime Transfer (CLT) and 3. Potentially Exempt Transfers (PET). And if there are multiple CLTs (e.g. you're doing a gift trust (discretionary) and a discounted gift trust (discretionary), do the one with the smaller CLT value first.

Q: Can you explain as an example how the tax refund on income tax works when paid IHT on Pension post age 75. Lets say the IHT bill on pension was £200K beneficiary 40% tax payer.

A: A £500,000 pot had a £200,000 IHT liability. If IHT it is paid from the pension then the balance of £300,000 is taxed according to the normal pension tax rules, tax free if death pre 75 and subject to marginal rate tax post 75.
If the pension did not pay the IHT then you get to reduce your taxable pension income by the amount of the IHT payment so, instead of having £500,000 of taxable income you will be deemed to have only £300,000 taxable income. If you went into drawdown with the £500,000 then in essence your first £200,000 of income would be tax free. There is obviously no question of income tax refunds on pre 75 death benefits.

Q: Hi Les, is it loan trust before gift trust? or vice-versa? thanks.

A: Yes, the order of gifting should be > 1. Loan Trust / 2. Chargeable Lifetime Transfer (CLT) and 3. Potentially Exempt Transfers (PET). And if there are multiple CLTs (e.g. you're doing a gift trust (discretionary) and a discounted gift trust (discretionary), do the one with the smaller value first.

Q: Why are absolute trusts pointless for adults if the settlor wants the money to go to them especially if family?

A: To clarify we meant Absolute Gift Trusts in “mainstream” IHT planning.

They are basically pointless as the adult beneficiary can collapse the trust whenever they want. Separately, the trustee of the bare trust should be telling the beneficiary that they are entitled to the funds. The money is in the total control of the absolute beneficiary so give the beneficiary the money and advise them on their investment. 

Absolute Loan Trust and DGTs are different as the trustees will need to retain money to ensure that the loan can be repaid or settlors payments made so the beneficiary does not have total control of the funds.

Likewise, there may be bespoke situations for example personal injury or disability where a bare trust for an adult is not pointless.

Q: Is there a reason M&G favours the Loan Trust, considering the original amount will come back into the estate?

A: This is true, but the reason we like the loan trust is that it provides full flexibility to the settlor, whilst also creating the potential for IHT savings.

If a client doesn't need the capital and is prepared to make a gift, then you're right, the loan trust would not be appropriate.

But what we find with clients is that they are often reluctant to make gifts, as they are concerned about potentially needing access to the funds in their final years (e.g. care home fees). So that is why a loan trust can be a great tool for these clients.

They are also useful to get growth out the estate where the NRB is not available.

Q: At which point does it become a good idea to write off the loan trust? Does there need to be a clause in the will or can a variation of Will achieve this?

A: When the settlor no longer needs access to the loan and is happy I tis available to the trustees for beneficiary use. Remember writing off the loan is a gift.

Q: You suggested that absolute trusts are pointless for adult beneficiaries, if I understood correctly. Could you explain the reason for this?

A: To clarify we meant Absolute Gift Trusts, the money is in the total control of the absolute beneficiary so the trust is pointless in our view. Give the beneficiary the money and advise them on their investment. Loan Trust and DGTs then there are obviously uses as the trustees will need to retain money to ensure that the loan can be paid or settlors payments made so the beneficiary does not have total control of the funds. There may be more bespoke uses where there is vulnerability/ disability/ personal injury estate but we don't see the point in mainstream financial planning.

Q: Do G&L trusts have to be registered?

A: Yes

Q: You metioned absolute trusts are pointless for adult children. Please could you expand particularly for a loan trust if a donor wants the guarantee of beneficiary?

A: To clarify we meant Absolute Gift Trusts in “mainstream” IHT planning.

They are basically pointless as the adult beneficiary can collapse the trust whenever they want. Separately, the trustee of the bare trust should be telling the beneficiary that they are entitled to the funds. The money is in the total control of the absolute beneficiary so give the beneficiary the money and advise them on their investment. 

Absolute Loan Trust and DGTs are different as the trustees will need to retain money to ensure that the loan can be repaid or settlors payments made so the beneficiary does not have total control of the funds.

Likewise, there may be bespoke situations for example personal injury or disability where a bare trust for an adult is not pointless.

Q: Within a loan trust, if a client survives a while, how can one prove to HMRC that the growth is outside of the Estate? Can such a trust provide a certificate to prove the point?

A: It is not required as it is a matter of fact - the growth accrued to the trustees it is they who made the investment. The estate only comprises the outstaning loan

Q: what are your thoughts on loan trust v gift and loan trust?

A: Our thoughts are they are the same thing. Gift and Loan Trusts used to be estableshed with a small git prior to the loan - we don’t; think that is necessary or common now - you just do the loan. But a combination of a gift trust and a loan trtust shoudl eb common where there isassets over the availabel NRB tyo go into trust - thoguh I

Q: Can you remind the difference between loan and gift trust

A: With a gift trust the settlor makes a gift into trust. The settlor is excluded from benefitting from the trust fund. The gift will be a potentially exempt transfer (a PET) if an absolute gift trust is used or a chargeable lifetime transfer (CLT) where a non-bare trust is used. Either way, the gift forms part of the settlor's IHT calculation for 7 years and then is outside the estate (any growth is outside the estate from day one). With a loan trust, the settlor makes a loan to the trustees of the loan trust which the trustees then invest. There is no PET or CLT because the outstanding loan forms part of the settlor's estate and can be accessed by them at any time. With a loan trust it is the value of the trust in excess of any outstanding loan which is outside the settlor's estate for IHT.

Q: Is it possible to create/access a calcuator/report to illustrate the Net Legacy calcs/pie charts that you illustrated please?

A: All the number and graph work was done on Excel. It may be possible to create a calculator to model out these types of scenarios however we have no plan at the current time to create one for our website. The amount of variables is mindboggling at present.

Q: I saw a few weeks ago that Gov working group on implementing this has suggested that might need delaying if certain issues couldn't be resolved by April. Any update on this?

A: We are not aware of anything that suggests the IHT changes to pensions will be delayed beyond April 2027. For the pension industry to be ready in time the IT at the HMRC end will need to be in place, we believe the noise was around this point.

Q: We are required to use Cashcalc to model IHT but currently no capability to deal with gifting pensions in lifetime. Any suggested modeller than can do this?

A: I'm not familiar enough with the calculator options available in the marketplace.

Q: is there any thought being given to those clients who have not reached NMPA who hold "unused pension savings" - this would appear to be unfair as the pension funds are "unused" as legislation prohibits access?

A: We are aware of the point being made but don’t believe anything will be changing.

Q: Is it still sensible to continue to hold commercial property within a SIPP, given its liquidity, in the event of a significant IHT liability?

A: This would need to be considered on a case by case basis and should not solely depend on liquidity. It should be remembered that pension schemes have previously had to deal with liquidity issues e.g. to pay lifetime allowance charges, so this not an entirely new problem. Its possible in some cases to come to an arrangement to pay with HMRC over an extended period of time. Also, SIPPs and SASSs, have the ability to borrow against certain assets which may be useful if they need to pay the IHT.

Q: but - you need to have access to cash to pay the IHT bill before probate is issued. So - the insurance may take money out and not grow as much - but at least they will have some funds to pay the bill so they can get probate? Thoughts pls?

A: You are right in stating that the insurance policy would provide a simple way to pay the IHT liability. But this should not be the main driver of the insure vs invest debate. If there isn't sufficient liquidity in the estate to pay the IHT liability (via HMRC's direct payment scheme), then the executor could consider using a short-term loan to pay the IHT, which could then be repaid using the funds that were invested. What is more important is providing a better outcome for the client, and as touched on in the webinar, investing regular premiums does provide the family with a lot more flexibility than a whole of life policy. As a reminder, a whole of life policy effectively ties up the capital until death, so this can be problematic if the client's circumstances change (e.g. care home fees). Any trusts established could loan money to the estate if required too (Like in the case study the trust were well able to support the IHT liability).

Q: On a WOL, Care fees looks to cause an issue, if required, as affordability disappears. Is the industry looking at this issue, so policies pay out if Care required, otherwise premiums could be pointless, if policy has to be surrendered.

A: This is a good question, but I think it's one you will need to ask at a protection webinar. This is something they would need to address.

Q: are there any calculators we can run these scenarios ?

A: None that we are aware of - we just run several roll ups on Excel then done some tax sums to suit

Q: Client dies pre75, so pension is tax-free. Can a beneficiary use these funds to buy an annuity - would it retain tax free status

A: Yes, it would retain its tax-free status. But the beneficiary cannot add any death benefits to the annuity.

Q: Forward planning is sensitive to growth assumptions. Has FCA commented on using Prufund EGRs ?

A: Not specifically. But do say assumptions should be reasoned and reasonable. And we believe our EGRs are.

Q: Can you remind us why you might recommend an Onshore over Offshore Bond within Loan/Gift trusts?

A: See May's webinar - broadly identify who is going to be liable for any events and make your decision as if it were individual investments

Q: Do you anticipate that a new Government will reverse the IHT position on pensions? I appreciate that this is very much a crystal ball scenario but Reform UK and the Conservative Party appear to be anti the Labour IHT proposals.

A: Who knows! If you reverse the changes where do you tax instead!

Q: Great webinar thank you. I have a similar client profile however the two kids are based overseas - Spain and The Netherlands. Are Trusts recognized internationally for the two internationally based kids / beneficiaries who are HRT payers?

A: Different countries have different rules. If there are cross border implications we think you need to collaborate with relevant professional who understands the regimes in question.

Q: Is there any thought process Rachel Reeves might backtrack the Pension changes being applied like the Agri relief was modified?

A: I'm sure there is but given it is now enshrined in law we doubt it.

Q: Les, for control of capital on death, is the new efficient threshold for income withdrawal £100,000? It seems to me that in terms of distribution on death, this will save extra tax and time.

A: We suspect withdrawing pensions at up to 40% tax to then gift may be a viable option for some.

Q: Are there any "back to back" rules (associated operation) on annuitising and then setting up a life cover policy?

A: We believe there are no back to back issues assuming the annuity policy and protectin policy are set up in clearly independent standalone commercial terms.

Q: Is there any difference on a UK pension and an offshore Qnups for UK residents?

A: QNUPS are also included in the estate under the new rules.

Q: Where can I register for the offshore vs onshore bond webinar please?

A: https://events.mandg.com/onshore-or-offshore

Q: Currently, the FCA looks at pension income being sustainable for life, with the view of drawing the pension far quicker and relying on on other assets. What are the compliance implications from the FCAs point of view

A: Compliance is not our specialist subject but we don't believe the FCA are overly concerned how clients needs and objectives are met, and what is used to meet them, as long as they are met suitably.

Q: Husband dies and leaves NRB in trust through his Will. Lawyer wants to put NRB value of house in trust and is against using part of drawdown pension. What are your thoughts on this please?

A: We leave houses in trust to the legal profession. It’s generally out of our comfort zone. You would hope they would do this in conjunction with an adviser so the plan hangs together at a holistic level.

Q: Can you gift into something on a reg basis, out of clients estate, that as IFA can keep advising on?

A: A trust? Ot gain the next generation who is receiving the new income as clients?

Q: Can you talk us through the legacy tool - i.e. what are we putting in the terms box

A: Speak to your account manger or have a look at it here https://www.mandg.com/wealth/adviser-services/tech-matters/tools-and-calculators/pension-legacy-modelling-tool

Q: Pension Legacy Modelling Tool - is the beneficiary income tax rate assuming that the beneficiary takes the entire pension pot as a single lump sum?

A: Yes

Q: When do you expect the rules around the minimum retirement age increase to come out to confirm if someone starts drawdown at age 55 in Jan 28 will this continue after April 28 or will they not be able to access any more income until age 57

A: Next two to three months hopefully

Q: Re: gifting, I believe you can gift to Charity and Sports Clubs. Please could you clarify the definition of a sports club?

A: Heres what HMRC have to say - https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm11140

Q: Labour have come back to the honey pot of more tax for their overspending, whilst they have promised growth. Where are they most likely to tax next with respect to bonds?

A: We haven't the faintest idea where any party who gets the power will look to for tax - btu there is a general trend form all parties that is is the taxation of capital not income that seems to be to the fore.