Monday, 25 May 2015

Gifting the Inheritance Away

I have two adult sons who have both done fairly well for themselves but have followed very different paths.

The eldest has lived in rented accommodation in London since graduating. At first he lived with a succession of house mates and then a long-term girlfriend but he is now on his own which is very expensive but at 31 he feels he needs his own place. He has a job that pays him well enough to live in London and has paid off his student loan but he has never saved beyond a few hundred for his next holiday. Recently he has become very disillusioned with his career (a para-legal job in the health services). His salary is barely creeping up, promotion prospects are poor and his pension is being down graded quite drastically. Basically he is bored, burned out and bordering on unhappy.

My youngest son has not yet ventured out of full time education after moving from a degree to an MA and then a PhD which he is just finishing. He has done some teaching work along the way but has mainly been funded via scholarships and bursaries which he has won due to hard work and excellent academic results. He actively enjoys living frugally which has helped. His friendship group is large and very supportive and he's very happy where he is.

Both my sons have a potentially life-shortening genetic illness. I mention this because it does make a difference to the decision-making process that my husband and I have just gone through. We have decided
to give/gift/pay out around half of our ISA savings to our sons now, when they need it, rather than continue to save it in case we have a "rainy day" (whatever form that might take).

As we aren't even proper "pensioners" yet we haven't really thought much about inheritance. We don't expect to end up paying any inheritance tax given that a surviving married partner also inherits their partner's unused allowance so this means that the total estate would need to be over £650,000 before any is due? Someone please correct me if this is wrong.

But in any case the timing of inheritance is something over which you have no control and doesn't fit in with anyone's plans. Why would we want to sit on cash "in case" when there is currently a valuable use for it. Waiting till we die to pass the money on to our sons makes less sense the more I think about it. We have around £70,000 in our ISAs which only form part of our retirement plan in that it would be used to provide a small amount of income (maybe about £3,000 a year) and be a care-cost buffer if we need it. In actual fact the costs of care are so astronomical that if residential care were to be needed for either of us on a long term basis, whether we had £35,000 or £70,000 would be soon become academic because it would vanish in such a short period of time. This is a scary thought but it does mean that keeping the ISA funds for this purpose doesn't make a whole lot of sense.

So we have decided to manage the money so that our sons can have around £17,500 each over the next couple of years. My eldest son can then leave his job and do a Masters in a subject he will enjoy. The change in him since we talked about this and told him of our decision is remarkable. He's full of enthusiasm and plans for the future, whereas before he seemed to be losing his naturally positive outlook on things. I defy anyone to tell me that this is the wrong thing to do.

I need to do some work on how we can do this and what would be the best way to "gift" it. I also need to bottom out which bits of our ISAs to sell and move into cash, whether to give the money as lump sum(s) or regular payments and investigate implications for taxation. In addition to the money my eldest son will hopefully be living in our studio flat for a year whilst he does the course so I also need to work around the loss of the rent for that period. Back to the spreadsheets.

In the middle of all this I'm expecting to put in my application for VR during the summer which might, or might not be accepted. Interesting times :-)

16 comments:

  1. Interesting times indeed Cerridwen - good luck with it all!

    I believe there are plans to increase the IHT allowance to include some exemption for the value of the main residence which will increase the joint ceiling from £650K to £1m - maybe something in the budget in July.

    I should not think tax on the gifts to your children will be an issue - but obviously double-check the situation before you proceed.

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    1. Thanks DIY Investor. I will check the tax out. I suppose it would be something you need to declare on a self-assessment form which we don't currently have to fill in as our rental income is below the level where it becomes a requirement - we just give HMRC a verbal estimate each year. I'm thinking it would probably be better to fill in the form and be done with it next year.

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    2. You do not have to do a self-assessment just because of a gift. You can gift what you like to whom you like with no tax consequences, unless your estate becomes liable to IHT.

      You can gift £3k per tax year exempt from IHT; £6k if you didn't use the previous year's allowance. Your husband can do the same. You can also gift an exempt £250 to anyone who didn't receive the £3k. And (mark this!) you can make regular gifts from surplus income free of IHT. Of course that requires you have surplus income. Moreover, if you survive seven years then gifts that wouldn't otherwise have been exempt become exempt. Moreover again, I think (the hmrc pages will confirm or refute) you can pay for education and maintenance of a child in full time education free of IHT.

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    3. The full time education exception is worth noting - thanks- although "child" is a moot point :-)

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  2. Wow! Lots of significant proposals and changes thrown in together there!

    I think you're right with regards to power of being able to pursue something you enjoy after a period of disillusionment. Miss DD has recently quit her job--which she was, sadly, no longer enjoying--and is set to return to do a Masters this October.

    Obviously, from a financial standpoint it is not great especially as my earnings will become increasingly volatile at almost exactly the same point (that's how it works sometimes!). But from a personal and emotional standpoint she has changed dramatically in her optimism and drive and she has not even started it yet. I am sure your son will experience much the same feeling once he has decided how to progress.

    Lots for you to work out! Certainly get back to those spreadsheets. You may be tinkering for a while I think! But it will be worth it.

    Good luck with it all including the voluntary redundancy proposal!

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    1. Thanks DD,
      My son has become a different person already. I don't think even he'd realised how "down" the job was making him feel and the rejection of a request for a couple of increments to be added to the salary scale of his role as part of a pay review a couple of weeks ago was the final straw. Now he just needs to get his application in and get himself a place. If not this year, then next :-)

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    2. People who are badly browned off by their jobs should leave. Sticking around can damage your health. Some people feel tied by having a family to pay for; anyone unencumbered should just flee. And next time save up a good "get stuffed" fund.

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    3. Thanks dearieme,

      I agree, what's the point in hanging on if you have a way out to something better and making sure you have a "get stuffed" fund can buy you some time to find it, which is why everyone should have one. I'm hoping that will be a lesson learnt coming out of this :-)

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  3. Hi Cerridwen

    Big changes to your plans but is seems like you (and your family) have thought about this and it sounds to me like the right decision to make all round.

    As I have no dependents, the inheritance thing isn't something I think about, although I'd like to leave something for my niece/nephews and my godson.

    I'm not sure of the best way to give such amounts of money without incurring the wrath of the tax man but I guess there must be a way, maybe instalments?

    Having your son move out of his expensive flat in London and living in your property makes sense and although it means no rental income for you, it seems like a good temporary family solution.

    All the best with your new spreadsheets and also good luck with your VR application!

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    1. Thanks weenie,
      The flat was originally bought for my younger son to live in during the year between his degree and MA so now it feels right for the older one to have a turn and, as it's only a few miles away from where we live, it'll be great to have him much closer to home.

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  4. The main way w.r.t. the taxman is to survive seven years after the gift (it is tax-free for the recipient, it doesn't count as income). Sounds like the exception to help pay for living cost of children still in full time education may apply too?

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    1. Thanks ermine,
      I suppose it's best that I make the gifts then, being the youngest and in a better state of health (in theory anyway :-)). So if I die within 7 years any gifts would be subtracted from my inheritance tax-free allowance and the remainder of the allowance passed on to my husband? The exception for living cost for someone in full-time education would apply so that would be useful in my elder son's case and maybe if we pay his fees ourself it doesn't count as a gift? This is all new to me but I'm sure the answers are out there somewhere. :-)

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    2. The full-time education exception certainly seems worth using - the HMRC site specifically says living costs for children in full-time education so I don't know about the fees.

      As dearieme said you each have a £3k IHT free a year gift allowance annual exemption anyway, and can roll up last year's annual exemption into this year to make it 6k each for this first year (ie 12k in total between you) so that looks good for a start. This you'd presumably direct to the son not in full-time education, and an equivalent amount to the son in FTE to help him with his living costs over a couple of years ;)

      The liability to IHT starts to fall away on a sliding scale 3 years from the gift date to the 7 year exemption, which probably would favour you making the gift (after using the exceptions). Anon makes a good point about noting these in a safe place which will make life easier for the executor of the will/whoever deals with probate

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    3. All very good factors to note - thanks. Keeping records and staying alive seem to be the key points :-)

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  5. Hi Cerridwen, I don't think you need to worry about the tax implications, if you are below the IHT threshold. as ermine says, these are potentially exempt transfers, and come back into your estate if you die within 7 years. Your sons don't need to declare them , no tax implications for them. all you really need to do is make a note that the gift has been made and keep it somewhere with your records/will.

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    1. That's a relief and makes things much simpler going forward. Thanks for taking the time to reassure me :-)

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