WEBVTT

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Tom contacted me via my website recently to talk

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to me about retirement and he told me a really

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interesting story about his inheritance tax position.

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Now I've changed names and numbers to maintain

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anonymity and simplify the maths. Well here goes.

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So Tom is single. He's got a daughter Claire.

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He's 70. and he has a house worth half a million

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pound and a DC pension pot of a million pound

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of which he draws down £35 ,000 per year. Now

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we recently looked at his inheritance tax position

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and noticed that because of the recent changes

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to how pensions are treated for inheritance tax

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that his estate would be liable for £400 ,000

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in inheritance tax if he died and passed the

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estate on to his daughter. Given that before

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this change there'd be no inheritance tax he

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was somewhat annoyed. So he told me his plan.

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The incentive split is one million pound pension

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pot in half and by two annuities. The first would

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be a five -year fixed term annuity and the second

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a lifetime annuity. He's received the following

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quotes. He'll get £110 ,000 per year for the

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five -year fixed annuity. and £35 ,000 per year

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from his lifetime annuity. Now using HMRC's normal

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expenditure out of income rule he intends to

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gift the £110 ,000 per year to his daughter for

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the next five years. Now as this £110 ,000 is

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in gift Claire would need to declare it or pay

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an income tax and after five years he'll have

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a regular income of £35 ,000 per year that's

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index linked. And he'll have zero left in his

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pension pot. Now, when he dies, he'll be able

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to pass this £500 ,000 house to his daughter

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without any inheritance tax due. Zero inheritance

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tax paid, £400 ,000 saved. Claire now has a million

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pound plus and an extra £50 ,000 and has paid

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any tax on it. Now, before I tell you how the

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conversation went from there, I've got some questions

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for you. Will HMRC be happy with this position?

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Two. Is Tom leaving himself exposed financially?

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And three, is gifting £110 ,000 a year to a child

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a good idea? Tom is approaching retirement and

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he's in a four -chair position. He's got a million

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pound in a defined contribution pension. But

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like many of us, he's been losing sleep over

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the new inheritance tax changes. Now, he came

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to me with what looked like a master plan. He

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was going to split that £1 million pot right

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down the middle, and half would buy a lifetime

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annuity to cover the basics. The other half,

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he'd buy a five -year annuity, which pays a massive

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£110 ,000 a year for five years. And he was going

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to gift every penny of that to his daughter,

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Claire. Using HMRC's gifts out of surplus income

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rules. Now on paper, it looked brilliant. It

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aggressively reduced his estate and passed wealth

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to his daughter, tax efficiently. But, in the

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end, did he go with it? Well, I asked Tom to

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think about a couple of things. I asked him...

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Two very difficult questions before he actually

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went and purchased these annuities. And last

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week I caught up with him again to chat on one

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of his leases. Thinking was, how his plan had

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changed. The first question I left him with was,

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how will a sudden payment of £110 ,000 a year

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actually impact your daughter Claire? And he

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told me I had really battled with this one. And

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to understand why, we need to look at some of

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the background that he gave me. I've changed

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names, obviously, to protect the privacy for

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Tom and Claire. Now, Claire is now 30. And she

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was a star student when she was at school. And

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she actually started an engineering degree at

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uni. But she switched to photography. She couldn't

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enjoy. the technical elements of the engineering

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group. And Tom had supported the whole way, you

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know, fees, accommodation, everything up front.

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But over time, things drifted and she left uni

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without finishing either degree to start a business.

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And Tom founded a photographic studio for her.

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But the passion for the business side faded.

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And today, she's got no earnings, no pension.

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She relies entirely on Tom. There's also an issue

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with social drunk use as well. Not enough for

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rehab, but enough for Tom to worry. So, let's

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have a look at Tom's tax plan again. He hands

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her £110 ,000 for five years. Now, the best case

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scenario he could come up with was she buys a

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flat, starts a pension, but then he's worried

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that at age 35, when the money stops and Tom's

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funds are depleted, suddenly... She has to support

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herself for the first time in her life, really,

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with no history of budgeting or working. And

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that's a terrifying cliff edge for anyone. The

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worst case scenario, though, the money fuels,

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lifestyle issues, the drug use increases, the

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capital is gone, with very little to show for

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it. Now, Tom admitted to me that he worries his

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financial support of the last decade has already,

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unintentionally, dampened their ambition and

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he realizes that backing a dumb truck of cash

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into her driveway may not be the best gift it

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may be the burden that she isn't equipped to

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carry so i said i asked him two questions and

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the second was will your plans leave you tom

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in financial difficulty now tom's initial spreadsheet

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except that they only needed £35 ,000 a year

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to live. So, given the way, the rest seemed fine.

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But, you know, spreadsheets are dangerous things.

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They love monthly averages, but life is lumpy.

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And Tom had forgotten some of the big stuff.

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The new roof three years ago he had fitted. The

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new kitchen renovation he had last year. That

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was £30 ,000 he hadn't accounted for in his spreadsheet.

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Now, he also knows his boyish 15 -year -old,

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and that's going to go pop any day now. But there's

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something else. Something beautiful, actually.

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Tom is an ecologist by trade. He's now retired,

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but by trade he's always been an ecologist. And

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his passion, his life's purpose, is the Ecuadorian

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rainforest. And for years, he's been funding

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locals in Ecuador to buy land where they attack

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wildlife. Now he left this off his budget spreadsheet

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because he'd labelled it as optional. But when

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he sat with it, he realised it's not optional,

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not to him. If he stopped that funding to pay

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for this tax plan, he would lose a massive part

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of who he is and what his purpose is. So where

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does that leave Tom? Tom realised that the surplus

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income he thought he had didn't really exist

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in the way he calculated. Not if he wanted to

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keep a roof over his head and a purpose in his

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heart. He told me that I realised my plan was

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financial when I needed a plan that was social.

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So the tax plan is officially... on hold at the

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moment while Tom considers his options. He's

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looking at how he can continue to support Claire,

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his daughter, in building some independence rather

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than just building a bank balance. And he's securing

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his own oxygen mask first. Tom's a member of

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this channel, and I know he'll probably watch

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this. It takes incredible courage to look at

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a spreadsheet. Realise it doesn't match your

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reality and hit the brakes. So if you have any

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words of support for Tom, I'm going to say let's

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keep it good vibes only.