Older Pep and Isa holders at risk of IHT charge

[CliveV]

This just in from one of the "Pinks" - may be of interest

Friday 17th November 2006: 11:30 By Nyree Stewart

Older investors holding onto savings in Peps and Isas could lose 40% of their savings through Inheritance Tax (IHT), claims the Way Group.

The company warns thousands of families could be hit with an unexpected IHT charge as many elderly parents hold on to these types of "tax-free" investment plans, without taking the necessary steps to protect their estates when they die.

It estimates around 165,000 investors aged over 70 are holding "tax-sheltered" portfolios worth more than £100,000, which based on current mortality rates means around £0.5bn of the total yearly IHT tax revenue of £3bn, comes from IHT tax charges on Peps and Isas.

At the moment Way Group believes there are around 300,000 investors who hold a large amount of equities-based tax free investments in their portfolios, with no plans for their portfolios to be transferred into an alternative investment scheme which will protect their savings when they die.

Paul Wilcox, chairman of the Way Group, says out of these investors over half, around 165,000, are aged over 70 and points out these are the ones which are at the greatest risk of losing out on the tax free benefits of their savings strategy.

He claims investors have been "seduced by the government" into building up their investments within a 'tax-free umbrella', but warns many do not realise they will suffer a "punitive IHT sting at death" when they and their families could lose 40% of their savings.

Wilcox adds: "It is worrying so many investors at this time of their lives do not gift their portfolios into a flexible trust for their beneficiaries. Common sense planning like this means the clients retain access to their funds and will in all probability avoid IHT."

And he points out while younger investors will want to take advantage of the benefits of Isas, to build up tax free funds for planned events such as school fees, Wilcox points out it does not make sense for older investors who could easily fall into the IHT trap.

"Over recent years the government has made it increasingly difficult for investors to mitigate IHT on their homes," says Wilcox.

But he adds: "By stealth tactics it is also misleading investors into thinking there are substantial tax benefits in retaining Pep and Isa portfolios, while simply ensuring they can continue to collect large amounts of IHT from the unwitting and unprepared elderly investor."

 

[Val & Frank]

Hi CliveV

Just to let you know these posts are welcomed, certainly by me.

Thanks

Val & Frank

 

[gypsy]

I intend to spend what I have so no fear of the dreaded tax.LOL.

 

[CliveV]

Thank you Frank. And Shiba - that is a very wise move.

Anyone read the Saga magazine for October?

Excellent article on the Pensions Scandal with a truly cringe-inducing responce from the pensions minister James Purnell.

As this is very much my area of expertise I wrote to the Editor:-

"Dear Sir

I read your Missing Pensions - The Human Cost article with great interest and agree with all the author states. However as an Independent Financial Adviser I would point out the following further points that should be asked of this Government.

1) How can the pensions minister possibly object to the

 

[RogerL]

On death of the holder, PEPs and ISAa, lose the income and capital gains tax shelter they've enjoyed during the lifetime of the holder. They're simply added to the estate just like ordinary investments, savings, property etc.

The problem is the low level at which IHT cuts in, the issue is nothing to do with PEPs and ISAs themselves.

 

[CliveV]

Apart from the fact that many elderly people that have PEPS and ISA's will swear blind that IHT will not apply as they are "Tax Free" and therefore do nothing.

The article is flagging up the fact that if a surviving spouse does nothing, and their house is worth

 

[Guest]

All absolutely correct. Except it ain't 5 billion G Brown is creaming off each year, it is now over 7 billion. If he repaid everything he 'stole' then the pensions black hole would be filled at a stroke, but is it likely??? Only if he raises Income Tax by 3p in the pound.

So we have a known problem but with no realistic answer. The only point I would make in favour of Pensions is that it is one of the few Schemes where payment cannot take place until retirement and that can 'protect' investments until they are needed. Frittering away money at younger ages is not necessarily the best option. 'Compulsory saving' was sometimes the only way any of us managed to create any retirement 'pots' at all. However, malpractice within the pension industry, along with media hype has created a belief that saving is not always a good option. However, I think a degree of realism is necessary. Never rely on anyone else to protect you. Do your homework on anything, especially if the salesman tells you it is a sure fire winner. Spread all your investments from cash through all forms of wealth creation schemes, even possibly those that may involve a 4 legged animal in the 2.30pm race at Kempton. A few 'winners' and who knows what you could do?

IHT is a tax on personal wealth, yes, but is it a tax on wealth that has been created without input from the owner? House prices rise each year, but the owners don't actually pay anything to get this increase. I am happy to pass on to my heirs anything I have created during my lifetime, but anything that has come about due to extraneous circumstances is not necessarily anything I will lose sleep over, especially once I am in the grave, as until proven otherwise, I will have no say in the matter. If I was rich in the first place I would have all the schemes in place to ensure this did not affect me.

Now I object strongly to giving anything to the Tax man I don't have to as a resposible citizen, but, if I purchased a house in the 60's for 1200 pounds and it is now valued at 400000 pounds, should I be concerned at IHT on the value increase. My heirs will still make a very healthy profit. My main concern is whether it is my home, and the value that is to me.

As has been stated there are indeed ways of planning your assets to minimise the IHT element, and if legal, then these are good schemes to follow, as long as your assets are sufficiently over the limits to justify the investment. To my mind anyone who is not a 'millionaire' including property is not in this bracket. The majority of us are in the 'half millionaire' bracket, if lucky. However, Mr G Brown is no fool, even if I dislike him intensely, he will make sure that any scheme designed to avoid tax is fully investigated, and has been known to apply laws retrospectively where he felt tax avoidance was taking place. However, do not spend money on any scheme that may be invalidated by any future change in the law. I was approached by advisers a few years ago telling me my estate was liable to IHT when both I, and my wife passd away. It was all true, but... it was based on the premise we were passing away there and then, and no allowance was made for what I, or my wife would do in the future. Also there was no allowance for any future changes in the law, which are more than likely, especially with public pressure. So I was 'invited' to pay for a scheme that may, or may not be of financial benefit. I, and my wife, are fully paid up members of the SKI policy, as our children have all their own created wealth. Plus I don't feel they wish us to be parsimonious inorder to leave them fortunes (I should be so lucky). I am of the opinion that 'donating' them 300000 pounds tax free is not a bad deal.

So my conclusions, are that yes, there are issues that need to be examined., but these need to be assessed on an individual basis. Please do not have us fearing death as a guilt for what we may have left behind. And if you are young, please forget all thoughts of dying young and so avoiding the problems. That only happens in weepy Hollywood movies. You need to plan some future for yourselves, and pensions are just one of many answers. You now have the option to control these things far more than those of us of a previous generation, so use it wisely. Go see your financial adviser and listen carefully. Then go see another financial adviser, or 2, and listen again. Then go read up on the subject and only when you fully undertand what you wish to do, then go do it. If you feel that a financial adviser has given you the best options, then go do what he/she suggests.

I am a cynic and work on the principle that any investment that 'allows me to eat my cake, keep my cake, and can give me another cake as well', is one I like.

 

[CliveV]

Hi Scotch Lad

Once again, if I understand you correctly, you seem to be advocating a "do nothing" approach as you say in your post:-

"I am of the opinion that 'donating' them 300000 pounds tax free is not a bad deal."

But in the same post you say that IHT is subject to legislative change? Which it is of course, so no one can assume that the current zero rate band will stay as it is. However you are incorrect in assuming that this

 

[Clive-Cardiff]

The issue of Pep's not being "tax free" is one that I found out about just recently.

I held shares in 2 single company Pep's, the company concerned was bought out at a big profit for the shareholders. I thought that I was safe to draw the money out of the Pep's because I was under the impression that the funds were free of capital gains.

I contacted the Pep holder to check the situation but they were no help.

I the contacted the Inland revenue and after a lot of jumping from one department to another I was told that the profits in the Pep are free of capital gains as long as I leave them there. If I draw the money out then I'm lumped with a big capital gains bill.

This was all totally unexpected, as I had always believed "tax free" meant just that.

Keep up the Good work CliveV, your insight in these matters give us all plenty to think about.

 

[RogerL]

"If I draw the money out then I'm lumped with a big capital gains bill"

This isn't how my tax office works on PEP or ISA withdrawals.

Obviously if you subsequently invest that money directly in shares or unit trusts it will be liable for CGT but not on the capital gain made while in the PEP/ISA shelter.

 

[Clive-Cardiff]

This is what I was told by the Inland Revenue - if I withdraw the capital from the Pep, then the sum would be regarded as capital gains. I had already used up my allowance of capital gains on the sale other other interests, so Pep proceeds would be taxed at 40%.

I understand that I can leave the funds in the Pep and withdraw up to the capital gains threshold in the next tax year

 

[CliveV]

Hi Clive

From my understanding Roger is correct - there should be no tax charge on the investments that you have.

I would query this with the IR - I think you have been given wrong info by them.

And with all due respect to Roger as it looks like he works at the Revenue - they DO make mistakes.

On a similar matter we successfully appealed against a demand by the IR on one of our clients that he had to provide the IR with all the gains within his ISA & PEP holdings. Why we asked they are free of Income & CGT liability. Because I say so was the response. I letter to the local Inspector of taxes sorted the matter out and client got a "sort of" apology letter.

Another case with more serious implications was a Pharmacist who worked in the NHS (Sched E earnings) and was therefore in the NHSPS. But she also did regular work as a Locum Pharmacist in Chemist shops (Sched D earnings). So she also contributed to a Personal Pension Plan (PPP) on her Sched D earnings as a Locum. (This in pre A-Day and Pre Stakeholder times)

She received a letter from the Revenue stating that as she was a member of an occupational pension scheme she could not have a PPP. Despite many letters and phone calls to the chap at the Revenue he was not having any of it. He even got quite belligerent when we asked to speak with someone more senior as we thought he was wrong. He wrote to this lady threatening to fine her if she did not take steps to shut down the PPP and pay back the tax relief she had in his view been wrongly given and accusing my firm of giving wrong advice.

Another letter to the Inspector of Taxes and this time a full apology from the Inspector of Taxes himself.

So do not be hoodwinked into thinking that the IR personal are always correct - they make mistakes the same as the rest of us.

Perhaps Roger could point you in the direction of suitable IR leaflets etc that will help you

 

[RogerL]

CliveV - your supposition that I work(ed) for Inland Revenue isn't correct. I'm a retired IT Consultant having specialised in what is now termed Logistics.

My limited knowledge of investments came about after being forced to take investment responsibility for my own pension and other investments - after discovering that I knew more about investment taxation than my Independent Financial Adviser!

 

[CliveV]

Apologies for the misconception. And I am also sorry to hear your IFA was not up to speed on Tax matters. Like all things - you should choose who you take advice from very carefully.

We have been representing a client who was misadvised on a Pre 1974 Will Trust, the IFAs maintained no IHT liability but he had got it VERY wrong - to the tune of

 

[RogerL]

Apologies for the misconception. And I am also sorry to hear your IFA was not up to speed on Tax matters. Like all things - you should choose who you take advice from very carefully.

We have been representing a client who was misadvised on a Pre 1974 Will Trust, the IFAs maintained no IHT liability but he had got it VERY wrong - to the tune of

 

[Guest]

Clive,

All your points are 'technically' correct but they miss a lot of the intention of the post.

If you read you will see that I stated that if I were so lucky!!! I would have an estate of half a million, so a IHT valuation of 600k is not really relevant. As things stand I will hopefully live long enough, and spend enough of my ill gotten gains on myself and wife to keep my total estate value below, or just above any revised upgrade for IHT. If there is anything to pay it will not amount to much. I am sorry but I am not a millionaire, nor do I suspect are many who read this Forum. Yes, property prices are rising and that is the main source of 'wealth' for many people. So when I state that I am happy to donate 300k to my kids then that is the truth. They didn't earn it, I did. They have their own homes on which gains are potentially being made. I suspect that if someone told me that I was to get 300k for nothing then I would be quite happy. If they also told me that if certain conditions had been met then possibly??? I could have gained more, I would be disappointed, but not too upset. After all 300k is not something to be sniffed at, or at least it isn't in my world.

Now don't get me wrong, I am just as unhappy as the next man to pay taxes, but similarly I am not prepared to pay for something that may, or may not be of value to my heirs. It certainly won't be of value to me directly, as I will be deceased. Come up with a signed Contract with guarantees, then possibly, but we know that even 'guaranteed contracts' can sometimes be changed in time. In addition, something that depends on the vagaries of the government of the future, is another thing entirely. You mention solicitors, and mine has already discussed this with me, but agreed that the options available were not necessarily the best way forward, as neither of us could predict the future. You also mention Wills, and there we do totally agree. One must have a Will, but do ensure that if you move either north or south of the border , it is changed to meet with the different legal systems, particularly if property is involved.

I suspect at the end of the day we are looking at the same 'hymn sheet' but possibly looking at it from different perspectives, that is not too surprising, you are a finance man, I am an scientist/engineer. We both deal in facts, but mine encompass conception, as well as exactitude.

I think the important thing is to enjoy life to the full, and allow 'tomorrow' to sometimes look after itself.

 

[CliveV]

Apologies for the misconception. And I am also sorry to hear your IFA was not up to speed on Tax matters. Like all things - you should choose who you take advice from very carefully.

We have been representing a client who was misadvised on a Pre 1974 Will Trust, the IFAs maintained no IHT liability but he had got it VERY wrong - to the tune of

 

[CliveV]

Hi Scotch Lad

The options I outlined are pretty much nil cost options. Setting up a Will Trust costs no more than writing a Will without one!

Similarly, setting up a Trust around a Life policy is a free service from all of the providers.

I am unaware of any pension scheme trustees charging an employee to change his or her death benefit nomination from their spouse to a family trust.

So as I say, whilst I am sure that your children will be pleased with

 

[CliveV]

Sorry forgot to add that the use of

 

[RogerL]

Apologies for the misconception. And I am also sorry to hear your IFA was not up to speed on Tax matters. Like all things - you should choose who you take advice from very carefully.

We have been representing a client who was misadvised on a Pre 1974 Will Trust, the IFAs maintained no IHT liability but he had got it VERY wrong - to the tune of

 

[Rioja]

I feel like going over to "the other side" just reading this lot.

Death where is thy sting ?

 

[Guest]

So am I, I am going back to Malaysia, where the sun is warm, and the taxes are low.

Clive, I am sure you mean well, but as someone i believe said 'there are only 2 certain things in life, death and taxes'. Mr G Brown is hell bent on closing any 'loopholes' that prevent him from achieving at least one of these, maybe not this year, but certainly sooner or later.

My own answer is to ensure that I remain below any thresholds (where is that new van?) so if there is an issue, it will not be major. Joint tenants in common is not necessarily the panacea it is claimed to be.

But I do thank you for all yur input on an important subject.

 

[CliveV]

No problem Scotch Lad - I always feel that you and I have never had a problem "Agreeing to disagree".

It boils down to a game of chess with the likes of Gordon Brown. They have all been the same - whatever the actual party in power. One of his predessessors introduced a change whereby if you encashed part of an investment bond the tax charge applied on the gain - this was a marked change from went on before. His idea was that if you had a

 

[BJ]

I intend to spend what I have so no fear of the dreaded tax.LOL.

Me too.

I want to die with a Pound in the bank, so the taxman gets none.

As we have no children we are spending it now.