Tom contacted me via my website recently to talk
to me about retirement and he told me a really
interesting story about his inheritance tax position.
Now I've changed names and numbers to maintain
anonymity and simplify the maths. Well here goes.
So Tom is single. He's got a daughter Claire.
He's 70. and he has a house worth half a million
pound and a DC pension pot of a million pound
of which he draws down £35 ,000 per year. Now
we recently looked at his inheritance tax position
and noticed that because of the recent changes
to how pensions are treated for inheritance tax
that his estate would be liable for £400 ,000
in inheritance tax if he died and passed the
estate on to his daughter. Given that before
this change there'd be no inheritance tax he
was somewhat annoyed. So he told me his plan.
The incentive split is one million pound pension
pot in half and by two annuities. The first would
be a five -year fixed term annuity and the second
a lifetime annuity. He's received the following
quotes. He'll get £110 ,000 per year for the
five -year fixed annuity. and £35 ,000 per year
from his lifetime annuity. Now using HMRC's normal
expenditure out of income rule he intends to
gift the £110 ,000 per year to his daughter for
the next five years. Now as this £110 ,000 is
in gift Claire would need to declare it or pay
an income tax and after five years he'll have
a regular income of £35 ,000 per year that's
index linked. And he'll have zero left in his
pension pot. Now, when he dies, he'll be able
to pass this £500 ,000 house to his daughter
without any inheritance tax due. Zero inheritance
tax paid, £400 ,000 saved. Claire now has a million
pound plus and an extra £50 ,000 and has paid
any tax on it. Now, before I tell you how the
conversation went from there, I've got some questions
for you. Will HMRC be happy with this position?
Two. Is Tom leaving himself exposed financially?
And three, is gifting £110 ,000 a year to a child
a good idea? Tom is approaching retirement and
he's in a four -chair position. He's got a million
pound in a defined contribution pension. But
like many of us, he's been losing sleep over
the new inheritance tax changes. Now, he came
to me with what looked like a master plan. He
was going to split that £1 million pot right
down the middle, and half would buy a lifetime
annuity to cover the basics. The other half,
he'd buy a five -year annuity, which pays a massive
£110 ,000 a year for five years. And he was going
to gift every penny of that to his daughter,
Claire. Using HMRC's gifts out of surplus income
rules. Now on paper, it looked brilliant. It
aggressively reduced his estate and passed wealth
to his daughter, tax efficiently. But, in the
end, did he go with it? Well, I asked Tom to
think about a couple of things. I asked him...
Two very difficult questions before he actually
went and purchased these annuities. And last
week I caught up with him again to chat on one
of his leases. Thinking was, how his plan had
changed. The first question I left him with was,
how will a sudden payment of £110 ,000 a year
actually impact your daughter Claire? And he
told me I had really battled with this one. And
to understand why, we need to look at some of
the background that he gave me. I've changed
names, obviously, to protect the privacy for
Tom and Claire. Now, Claire is now 30. And she
was a star student when she was at school. And
she actually started an engineering degree at
uni. But she switched to photography. She couldn't
enjoy. the technical elements of the engineering
group. And Tom had supported the whole way, you
know, fees, accommodation, everything up front.
But over time, things drifted and she left uni
without finishing either degree to start a business.
And Tom founded a photographic studio for her.
But the passion for the business side faded.
And today, she's got no earnings, no pension.
She relies entirely on Tom. There's also an issue
with social drunk use as well. Not enough for
rehab, but enough for Tom to worry. So, let's
have a look at Tom's tax plan again. He hands
her £110 ,000 for five years. Now, the best case
scenario he could come up with was she buys a
flat, starts a pension, but then he's worried
that at age 35, when the money stops and Tom's
funds are depleted, suddenly... She has to support
herself for the first time in her life, really,
with no history of budgeting or working. And
that's a terrifying cliff edge for anyone. The
worst case scenario, though, the money fuels,
lifestyle issues, the drug use increases, the
capital is gone, with very little to show for
it. Now, Tom admitted to me that he worries his
financial support of the last decade has already,
unintentionally, dampened their ambition and
he realizes that backing a dumb truck of cash
into her driveway may not be the best gift it
may be the burden that she isn't equipped to
carry so i said i asked him two questions and
the second was will your plans leave you tom
in financial difficulty now tom's initial spreadsheet
except that they only needed £35 ,000 a year
to live. So, given the way, the rest seemed fine.
But, you know, spreadsheets are dangerous things.
They love monthly averages, but life is lumpy.
And Tom had forgotten some of the big stuff.
The new roof three years ago he had fitted. The
new kitchen renovation he had last year. That
was £30 ,000 he hadn't accounted for in his spreadsheet.
Now, he also knows his boyish 15 -year -old,
and that's going to go pop any day now. But there's
something else. Something beautiful, actually.
Tom is an ecologist by trade. He's now retired,
but by trade he's always been an ecologist. And
his passion, his life's purpose, is the Ecuadorian
rainforest. And for years, he's been funding
locals in Ecuador to buy land where they attack
wildlife. Now he left this off his budget spreadsheet
because he'd labelled it as optional. But when
he sat with it, he realised it's not optional,
not to him. If he stopped that funding to pay
for this tax plan, he would lose a massive part
of who he is and what his purpose is. So where
does that leave Tom? Tom realised that the surplus
income he thought he had didn't really exist
in the way he calculated. Not if he wanted to
keep a roof over his head and a purpose in his
heart. He told me that I realised my plan was
financial when I needed a plan that was social.
So the tax plan is officially... on hold at the
moment while Tom considers his options. He's
looking at how he can continue to support Claire,
his daughter, in building some independence rather
than just building a bank balance. And he's securing
his own oxygen mask first. Tom's a member of
this channel, and I know he'll probably watch
this. It takes incredible courage to look at
a spreadsheet. Realise it doesn't match your
reality and hit the brakes. So if you have any
words of support for Tom, I'm going to say let's
keep it good vibes only.