The term “inter vivos” can be roughly translated as “between the living”. One way to reduce your potential Inheritance Tax (IHT) liability is to make gifts during your lifetime to another person, hence a transfer between the living.

Everyone has a personal inheritance tax allowance, which is currently £325,000 or possibly higher depending on your circumstances. Any amounts above this are subject to inheritance tax at the rate of 40%. One way to reduce this potential liability is to make a gift during your lifetime. The main issue with this is that the gift will only be exempt from inheritance tax if you survive at least seven years after granting the gift. For this reason, such gifts are known as potentially exempt transfers. The liability to inheritance tax gradually reduces over the seven years as follows:

One solution to this issue is to purchase an insurance policy that will meet the liability for IHT. This would be due from the beneficiary for the IHT that would become due. A gift inter vivos policy is designed to meet the gradually reducing liability and pay out the appropriate sum on death within the first seven years. However, the main issue is that only a few insurers offer these policies.

Fortunately, there is another solution, which is offered more widely by insurers. With a multi-policy solution, the same result can be achieved using a suite of five term insurance policies each for a fifth of the total liability. The five policies run alongside each other with terms of three, four, five, six and seven years respectively. After three years, the first policy falls away, thus reducing the total cover by 20%.

The only real difference is that for a gift inter vivos policy, the premiums remain the same throughout the term, but for the suite of policies, they start a little higher and reduce overtime as each policy comes to an end.

In the unfortunate event of death within the seven years, the policies then, in force, will pay out and the premiums will cease.

Generally, it would not be sensible for the proceeds of the policy to be paid to the estate of the donor, as this is likely to increase the IHT due on their estate. To avoid this, the policy or policies should be written in trust. Not only then will the proceeds not end up in the donor’s estate, they can also be paid out without the delay of probate, so that the proceeds are available to the beneficiaries quickly to meet the IHT tax liability that will be due.

When determining the tax liability, you must consider how this interacts with the nil rate band for IHT, particularly with multiple gifts. It should also be noted that the liability on the remainder of the estate may be higher until the seven years have passed and the full nil rate band becomes available again. There are several things to consider and calculations to undertake, but if these are done properly, this can be an effective way to help the donor reduce their IHT liability. At the same time, ensuring that the beneficiaries of the gift are not landed with a tax bill to pay if death does occur in the first seven years.

Robert J Young Bsc FIA

Individual Savings Account (ISAs) and pensions each have their unique set of rules, and for this reason, they are both very different in how they work. Is there a right or wrong way to fund your savings and investments, and is there an advantage to using one investment product over the other?

In this article, I wanted to look at two different tax-efficient investment products that can be used for long-term savings. Let’s take a look at an overview of each of the products to see how they compare:

Why consider an ISA?

• ISAs are the most flexible form of tax-efficient savings plan available.

• ISAs can be accessed at any time. However, stocks and shares ISAs should be looked upon as medium to long-term investments (over five years). 

Why consider a pension?

• If the investment is being made for retirement (currently over the age of 55), the pension provides the advantageous benefit of tax relief on your payments. Remember you don’t get tax relief for payments to ISAs.
• If you are employed and meet the eligibility criteria, your employer must enrol you into a pension scheme and pay contributions into the scheme. These contributions will boost your payments and are in effect, free money.

 So, which is best for you?

• ISAs offer the most flexible tax-efficient products for your savings or investment, as you can access them at any time, with no tax to pay. However, as we have mentioned, if you are using stocks and shares ISA these are usually held for the medium to long term.
• You should consider a pension for your savings or investment if you are planning to use these funds in later life and won’t need to access the funds before your 55th birthday.
• Of course, you can use a combination of both ISAs and pensions for your savings and investments. This will depend on how much money you have at your disposal for this purpose. Using both products will allow you to use all the advantages of each and the monies will be sheltered in a very tax-efficient manner.

With both stocks and shares ISAs and pensions, the value of investments can go down as well as up and you may get back less than has been paid in. The value of a cash ISA may not keep pace with inflation.

Should you wish to discuss either of these products or have any other investment queries, please do not hesitate to contact us.

*The minimum age to access your pension will increase to age 57 from April 2028.

One of our Private Wealth clients had made several gifts, and was about to make another significant one as the result of a property sale. Each gift created a potential inheritance tax liability with total potential liability in excess of £2 million.

There is a liability to inheritance tax for seven years after a gift is made, with liability gradually reducing after three years. We arranged an insurance cover to pay this liability in the event of the death of the donor in the first seven years.

As each gift was given at a different time, we created a model to determine how the total inheritance tax liability changed every month for all of the gifts going forward. Then, we sourced insurance policies to meet the potential for inheritance tax (IHT) as closely as possible.

As the cover was not placed at the time each gift was made, it was not practical to meet the precise profile of the IHT liability. We agreed with the client that there would be some months where the cover would be higher than strictly required. We placed a suite of term insurance policies and wrote the policies under trust, so that in the event of the death of the donor, the resulting payment would not form part of their estate.

We agreed to work on a fee basis enabling the policies to be placed on nil commission terms, resulting in reduced overall costs for the client.

I often say to clients during our review meetings that I still see the ongoing pandemic as being the main contributing factor to the performance of the investment markets at this moment in time. This was seen in November, when the new Covid-19 variant, Omicron, changed investors’ sentiment around the world. The discovery of the new variant of the Covid-19 virus in South Africa saw all the main global equity markets generally fall over November. The fear, from an economic point of view, is how this variant will affect the recoveries that we have seen so far this year.

In the UK, news of the Omicron variant caused concerns over both the UK’s and the global outlook for their respective economic recoveries. It will also be interesting to see if this news will have any impact on UK monetary policy and its future direction.

Consumer Price Index (CPI) is on the rise

During October, the CPI continued to increase on the back of rising prices for energy, fuel and the second-hand car market. The year-on-year CPI figure rose to 4.2% in October, compared to 3.1% in September. This has increased the likelihood of an interest rate rise in the very near future. As we have reported in previous reviews, the Bank of England (BoE) do not expect these inflationary pressures to subside any time soon. They have predicted that we could see a figure as high as 5% by April 2022.

Base rate remained the same in the UK

Somewhat surprisingly, the BoE did not increase the base rate in their November meeting, leaving it unchanged at 0.1%. Members of the Monetary Policy Committee (MPC) voted 7-2 in favour of no change. However, the BoE Governor, Andrew Bailey, made it very clear that it had been a narrow escape in the meeting as to whether they should have been raised. It is now widely expected that the base rate will rise in the very near future, with the next MPC meeting due in December. However, it will be interesting to see if the new Omicron variant will have any bearing on their decision making in the short term.  During November the FTSE 100 index fell by 2.5%.

In the US...

A similar tale can be seen in regards to inflationary pressures. Much like us, higher energy prices and food prices are driving up inflation. During October, the US consumer price inflation went to 6.2%. Unlike the BoE, the Federal Reserve System (Fed) seems to be looking to take a patient view in regards to inflation. They expect the inflationary pressures to continue into next year but are predicting that they will fall back during the second or third quarter of 2022. With this in mind, The Fed has indicated that they can take a watching brief in regards to any thoughts of tightening interest rates. In November, The Dow Jones Industrial Average Index was shaken by the Omicron variant news and fell by 3.7%.

In the Eurozone...

The same issues were in play as in the UK and US. Rising energy prices saw the Eurozone’s rate inflation hit a record high 4.9% during November. Much like The Fed, the European Central Bank does not intend to raise its rates at this time. Their fear is that any policy tightening could have an impact on the economic recovery in 2022. For this reason, they have so far indicated that an increase in 2022 is unlikely to be seen. Meanwhile, in Germany, Olaf Scholz is set to succeed Angela Merkel as Chancellor. This follows a coalition agreement between the SPD, the Greens and the FDP. Germany’s Dax Index fell by 3.8% during November.

In the Far East...

Japan’s economy saw an annualised fall of 3% in the third quarter. Supply chain issues undermined export activity, consumption and capital spending. Over the month of November, the Nikkei 225 Index went down by 3.7%.

Many investment targets are set as x% above inflation and this is because you need to achieve an investment return at least equal to inflation to maintain the purchasing power of your funds.

This is the issue with keeping funds in cash, which many regards as risk-free whereas generally, any interest earned is less than inflation, so funds are falling in value in real terms. As noted above in much of the western world and indeed elsewhere, the increased energy costs and food costs are fuelling rises in inflation. Investments will need to work harder.

For those still in the accumulation phase where the emphasis is mainly on capital growth, the aim will be to ensure that the investment managers have reacted to this and have holdings in sectors that do well in inflationary times.

For those who have moved into the decumulation phase and are seeking at least some income, then a refocus of your investments may be required to be able to continue to draw income without impacting too greatly on the capital value. If these issues are worrying you then we are available to review your portfolio and your wealth planning and reassure you or make adjustments as necessary

As always, I hope that you find this market review useful. If you have any concerns regarding your investment and the impact of the Omicron variant, please do not hesitate to get in contact with us.

We helped our client, a beneficiary of their father’s pension fund, to receive these benefits in the most tax-efficient way possible, minimising the potential large amounts of income tax.

Sadly, our client passed away at the age of 79. We had previously advised them to complete a pension drawdown nomination form, and they had elected their partner, son and daughter to receive these funds.

The son wished to take his benefit in the form of a lump sum death benefit, equating to £60,000.

As our client passed away over the  age of 75, the death benefit is taxable at the beneficiary's marginal rate.

Therefore, the lump-sum would be added to the son’s other income in the tax year, and he would be taxed accordingly.

The son had a salary of £40,000. This meant if he had taken the lump sum of £60,000, he would have paid £22,000 tax in total (£10,000 at 20% plus £50,000 at 40%), giving him a net benefit of £38,000.

Instead, we advised that the son should use inherited drawdown; which is taxed only when the beneficiary withdraws an income from their inherited fund.

Using inherited drawdown, the son withdrew £10,000 per annum over six years. This meant no higher income tax was payable (£60,000 at 20% = £12,000).

By advising the son to use inherited drawdown, we saved him a significant £10,000 in tax, allowing the son to receive more of his father’s hard-earned pension benefits.

Inherited drawdown provides beneficiaries with the ability to spread tax over many tax years. The beneficiary has the control to withdraw monies when they wish, and this flexibility can help utilise tax allowances and limit the amount of tax payable.

This case illustrates the importance for clients to have nomination forms for their pension funds, to ensure these benefits are passed onto the people they wish, and to update these when circumstances change.

Don't hesitate to contact a member of our team to talk about your personal circumstances.