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Telegraph
2 days ago
- Business
- Telegraph
‘I'm desperate to invest but afraid of piling more inheritance tax on my daughters'
Receive personalised tips on how to improve your financial situation, for free. Here's how to apply or fill in the form below. Rachel Reeves's inheritance tax raid means it's growing ever harder to escape paying death duties. The Chancellor's decision to strip pensions of inheritance tax relief as well as freezing the nil-rate band until 2030 means the number of estates liable to pay the death levy is forecast to more than double by the end of the decade, according to the Office for Budget Responsibility. John Dixon is hoping to buck the trend. He has so far made few plans for how best to pass on his inheritance to his two daughters, but the death of his late wife Valerie in October has spurred him into action. He says: 'Some of the inheritance tax rules are baffling. I'm concerned if I leave things as they are, I'll find myself in the 40pc bracket [the rate of tax charged on an estate above the threshold] and it's something I desperately want to avoid.' The nil-rate band allows Mr Dixon to pass on £325,000 without incurring death duties, and he can pass on a further £175,000 if he leaves his home to a direct descendant. As his wife's allowance was unused, it means he can effectively pass on up to £1m to his daughters tax-free. But, if Mr Dixon is going to avoid paying inheritance tax, he needs to act quickly. A highly successful career in the telecommunications industry has left the 74-year-old with an extensive portfolio of savings and investments. He has amassed £320,000 in cash savings, including £50,000 sitting in his current account, on which he only earns 2.5pc interest on the first £25,000. He also holds the maximum £50,000 in premium bonds, while the rest of his cash sits in a number of different savings accounts. Mr Dixon also has a stocks and shares Isa worth £53,000 after his wife's funds were transferred to his account. He says he does not regularly make use of the £20,000 tax-free allowance. He says: 'I've got way too much in cash savings and I know it's ridiculous how much is in my current account. I'm desperate to get it out of there and put it somewhere where it can't do any harm in terms of additional taxes.' Additionally, he owns his home outright and had it recently valued at £950,000, and a combination of the basic state pension and two workplace pensions provides an annual net income of around £43,000 a year. As well as a positive attitude to addressing his finances, Mr Dixon is aided by a clean bill of health. 'I am from the North East and we would say 'I'm as fit as lop'. Everything works. I've got my own hair, my own teeth and, bar a few aches and pains of course, nothing desperately wrong.' He also stays fit by playing 18 holes of golf four times a week, something that has provided great comfort. 'Since Valerie died, I found myself playing a lot more because it helps enormously to think about something else and not being dragged back to her death and all of the sadness associated with that. 'Golf has been enormously helpful in that respect and the guys that I play with regularly have also been very helpful and supportive.' Dan Caps, investment manager, Evelyn Partners Based on the figures Mr Dixon has provided, his estate is made up of his home – valued at £950,000 – his cash savings of £320,000 and his Isa of £53,000. All of this brings his estate to £1.3m. Mr Dixon will also need to think about any personal effects and chattels that may need to be considered. Mr Dixon has confirmed that his wife's nil-rate band is unused, and the good news is this will pass to him automatically. Mr Dixon should also be able to benefit from both his and his wife's additional residence nil rate band, which was introduced in 2017. As such, he can pass on the first £1m of his estate free from inheritance tax, while any excess over this level will be subject to inheritance tax at 40pc. It is worth bearing in mind that Mr Dixon would begin to lose the benefit of the resident nil-rate band should his estate exceed £2m on his death, but given the valuation this currently seems unlikely. So, based on the above estate value of £1,323,000, Mr Dixon's current inheritance tax liability is in the region of £129,200. There are several steps Mr Dixon can take to mitigate inheritance tax, and he has already mentioned he is exploring gifts out of surplus income. As Mr Dixon's income exceeds his expenditure, he is able to give away the surplus and this will immediately fall outside his estate for inheritance tax. Mr Dixon should be able to demonstrate that these funds are not necessary to meet his standard of living, and a regular pattern to these gifts helps evidence this. As with all gifts, these should be documented, which will help when it eventually comes to dealing with his estate. In addition to this, Mr Dixon could gift some of the funds he holds in cash or in his Isa, and he tells us he has 'way too much' in cash savings. Larger gifts are subject to the potentially exempt transfer rules, which means they will fall outside Mr Dixon's estate seven years after the gift is made. Before Mr Dixon gives away large sums, he should think whether he may need these funds for himself in the future – to meet any care fees, for example. He should plan carefully and think about talking to a financial planner, who will be able to construct a cash flow forecast for him, which will give him greater confidence when making gifts. There are also lots of other ways to mitigate inheritance tax, including life assurance policies, investments which attract business relief and are free from inheritance tax after two years of ownership, and other smaller annual gift exemptions. All inheritance planning strategies require some form of trade-off and often a combination of a number of different strategies is most suitable. Again, a financial planner will be able to help Mr Dixon review all the options available to him. Gary Steel, senior wealth planner, Canaccord Wealth The first step would be to consider Mr Dixon's current plans given his recent change in circumstances. Does he want to stay in his current home? What changes does he see for himself in the future? We need to make sure he has sufficient funds and flexibility to enable him to live the lifestyle he wishes while also planning for the future. I would also recommend that Mr Dixon reviews his will at this stage to make sure his wealth is passed to his daughters on his death. He should also ensure he has drafted suitable Lasting Power of Attorney documents – a qualified lawyer would be invaluable here. Mr Dixon's wife died less than two years ago, so it should be possible to vary her will – assuming she passed her estate to her husband – to pass some of her wealth to their daughters. This would reduce the value of Mr Dixon's estate for inheritance tax purposes. As well as making gifts from surplus income, up to £3,000 per tax year can also be gifted by Mr Dixon, which is immediately free of inheritance tax. HMRC Form 403 shows how to calculate surplus income. But before making gifts, Mr Dixon needs to carefully consider his own requirements. A key factor is to ensure he has enough money for the rest of his life. A detailed cash flow analysis with a financial adviser will help him explore various 'what if' scenarios, help him make informed decisions and give peace of mind as he moves into the next stage of his life. The remainder of Mr Dixon's cash could be invested to achieve potentially greater returns than bank deposits, as well as keep pace with inflation.
Daily Mail
27-05-2025
- Business
- Daily Mail
Should I empty my pension into an Isa to dodge the looming 'double tax' on inheritance?
I am worried the size of my pensions will make my children liable for inheritance tax after the changes from 2027. I'm over 55, so is it a sensible idea to start making pension withdrawals, while keeping my annual income under the higher rate income tax threshold, and over time decant these funds into a stocks and shares Isa instead. The idea would be to empty my pensions entirely into my Isa by the time I reach state pension age. One of my reasons for doing this is that if I died after the age of 75 with some of my pension pot left, my children could face double taxation under the proposed new system, with inheritance tax on the pot and then income tax on their withdrawals. I realise any money left behind in Isas is liable for inheritance tax too, but the investments can grow in a tax efficient way like in a pension. At least I could access and spend the money freely without worrying about income tax, and maybe not inheritance tax in the end either. What would be the pros and cons of this strategy? Tanya Jefferies, of This is Money, replies: Many savers with larger pensions are keen to avoid a new inheritance tax levy. The money remaining in pension pots is going to become liable for death duties like other assets, such as property, savings and investments starting in April 2027. Some wealthy families will face a 'double tax hit' on inherited pensions. If a saver is aged over 75 when they die, their beneficiaries are still going to have to pay their normal income tax rate of 20 per cent, 40 per cent or 45 per cent on pension withdrawals too. For a 45 per cent taxpayer this represents a 67 per cent tax rate, and the tapering of the residence nil rate band down to nothing on estates worth £2million-plus would mean an effective tax rate of 70.5 per cent. It's no surprise then that people are casting around for ways to cut or eliminate a heavy future tax bill for their family. Before you even start worrying about this though, you should first consider if you really are likely to have a big enough estate to pay inheritance tax, especially after you have spent down your pensions during retirement. Scroll down to check the rules on who pays inheritance tax. Among those who will be affected, some are looking to cash in as much of their pensions as possible, while avoiding a big income tax bill - although it is better to avoid crystallising losses by making bigger pension withdrawals in market downturns. Recent research showed many savers with larger pensions intend to spend them by splashing out on more holidays. Other options include gifting out of surplus income which remains inheritance tax-free providing you can afford it, or buying life insurance and putting it in trust. Some savers will be deciding whether to leave more or all of their estate to spouses, who can still benefit from estates free of inheritance tax, instead of their children to delay and minimise the eventual bill. Wealth manager Evelyn Partners has suggested we could see a marriage boom or rise in civil partnerships among older couples as a result, and it has suggested six ways to cut inheritance tax on pensions here. Meanwhile, some people have raised the idea of siphoning pension funds into an stocks and shares Isa - even though these are also liable for inheritance tax, and there are other pitfalls. Several commenters on this recent story about families falling into the pension inheritance tax trap said they had started doing this already. We asked an experienced financial adviser to give his take on this strategy below. Ian Cook, chartered financial planner at Quilter Cheviot, replies: While it might seem intuitive to start drawing down a pension to move funds into a stocks and shares Isa in anticipation of inheritance tax changes, this approach comes with significant trade-offs that need careful consideration. From 2027, the government plans to bring pensions fully into the scope of inheritance tax. This has prompted concern among individuals with sizeable pension pots who are understandably looking for ways to mitigate a potential future tax bill for their beneficiaries. However, emptying a pension now in favour of an Isa could backfire. Firstly, withdrawing pension funds incurs income tax, and if you're still working or exceed your personal allowance, you could pay 20 per cent or more on each withdrawal. For example, to invest £20,000 into an Isa, you'd need to make a gross withdrawal of £25,000, instantly losing £5,000 to income tax. If those funds are then liable for 40 per cent inheritance tax later, you've effectively turned £50,000 in your pension into just £30,000 in net Isa capital. Isas, while tax-free in terms of income and gains, are fully liable for inheritance tax. Pensions while set to lose their favourable inheritance benefits still retain certain advantages, such as the ability to make gifts out of surplus income. There's also the matter of future reform. Isa rules are currently under review and there is no guarantee that today's generous allowances or freedoms will remain. Once you begin taking taxable income from your pension, you also trigger the Money Purchase Annual Allowance, reducing the amount you can contribute to pensions each year from £60,000 to just £10,000. This can significantly limit your ability to rebuild pension savings later if your financial circumstances change. And let's not forget longevity. At age 55, life expectancy stretches another 30 years or more. With such a long time horizon, the benefits of compounding inside a pension wrapper are hard to beat. For someone who doesn't need the funds urgently, leaving the money invested in a pension could result in significantly higher long-term value. Converting pension wealth to Isa capital purely to try and dodge future tax could prove an expensive misstep Ultimately, this kind of planning should be objective-led. If the aim is intergenerational wealth preservation, pensions still hold the upper hand. If the goal is accessibility and spending flexibility, Isas have a role. But converting pension wealth to Isa capital purely to try and dodge future tax could prove an expensive misstep. We'd advise waiting until we have certainty on how the 2027 reforms will be implemented before making any drastic changes. That said, if someone has a very large pension and looked set to go over the previous lifetime allowance, then the amount of tax-free cash available to them may now be capped. Under current rules, the maximum amount that can be withdrawn tax-free is generally limited to £268,275. In those instances, it may be sensible to begin building Isa wealth from other savings or income sources, rather than adding more to the pension. This can provide greater tax-free accessibility later in life while preserving the pension's longer-term tax benefits. How much is inheritance tax and who pays? Inheritance tax is levied at 40 per cent on estates above a certain size. Your estate is the term given to all the things that you own at death. Valuing this involves adding up everything, from your stake in your home, to your savings and investments, your car and your personal belongings. As an individual, your estate needs to be worth more than £325,000 for your loved ones to have to stump up inheritance tax. This can be doubled to £650,000, jointly, for married couples or civil partners, who have not already used up any of their individual allowances. A further crucial allowance, the residence nil rate band, increases the threshold by £175,000 each for those who leave their home to direct descendants. This gives a total potential extra boost of £350,000 and creates a potential maximum joint inheritance tax-free total of £1million. But the own home allowance starts being removed once an estate reaches £2million, at a rate of £1 for every £2 above the threshold.
Yahoo
26-05-2025
- Business
- Yahoo
Here's the Salary Needed To Take Home $100K on the East Coast
How much money do you need to earn to take home at least $100,000 on the East Coast? Your salary needs to be a minimum of $130,000 and more than $140,000 in states like Maryland and Maine. View More: Check Out: A recent GOBankingRates study determined how much income it takes to bring home a $100,000 salary by state. An in-house calculator was used to create income tax estimates, and these taxes were calculated as an annual amount to find every East Coast state's total annual income taxes paid and income tax burden. In alphabetical order, here's how much salary you'd need to take home $100,000 on the East Coast. Salary needed for $100K: $141,600 Tax burden: 29.4% Find Out: That's Interesting: Salary needed for $100K: $142,135 Tax burden: 29.7% Be Aware: Salary needed for $100K: $130,999 Tax burden: 23.7% Salary needed for $100K: $141,187 Tax burden: 29.2% Salary needed for $100K: $143,206 Tax burden: 30.2% See More: Salary needed for $100K: $146,521 Tax burden: 31.8% Salary needed for $100K: $140,643 Tax burden: 28.9% Salary needed for $100K: $130,999 Tax burden: 23.7% For You: Salary needed for $100K: $140,929 Tax burden: 29.1% Salary needed for $100K: $141,923 Tax burden: 29.5% Salary needed for $100K: $139,333 Tax burden: 28.2% Read Next: Salary needed for $100K: $138,408 Tax burden: 27.8% Salary needed for $100K: $141,429 Tax burden: 29.3% Salary needed for $100K: $141,801 Tax burden: 29.5% Methodology: To generate the income for what it takes to bring home a $100,000 salary by state, GOBankingRates surveyed income taxes at both the federal and state level (including FICA). Income tax estimates were created by using an in-house calculator for a single tax filer using the standard deduction (with 2024 tax brackets). Once the three income taxes were calculated as an annual amount, GOBankingRates found each state's (4) total annual income taxes paid and (5) total income tax burden. All data was collected on and is up to date as of March 12, 2025. More From GOBankingRates Surprising Items People Are Stocking Up On Before Tariff Pains Hit: Is It Smart? Mark Cuban Says Trump's Executive Order To Lower Medication Costs Has a 'Real Shot' -- Here's Why This article originally appeared on Here's the Salary Needed To Take Home $100K on the East Coast Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Daily Mail
25-05-2025
- Business
- Daily Mail
How much you really need to NEVER run out of money in retirement: Wealth experts reveal exactly what you will have to save - even if you live to 100
With an estimated 16,000 centenarians in the UK today, and an expected 110,000 by 2035, having a really long life is not a pipedream. A woman aged 60 now has a 6.2 per cent chance of reaching 100, so it's no surprise that pension experts suggest you structure your finances for retirement as if you will live that long.
Forbes
23-05-2025
- Business
- Forbes
Homeowners: How To Generate $2,400/Month For Life From Your House
Reverse mortgages and HELOCs may offer retirees greater financial flexibility during uncertain ... More markets. In today's volatile economic environment, even well-prepared retirees are feeling anxious. Many investors now fear a prolonged downturn in the market and are tempted to reduce their market exposure. But they know that at least historically investors who stay in the market do better. As a result, articles appearing in respected journals are not necessarily recommending wholesale changes to portfolios but are cautioning investors to reduce spending. I don't like that advice, especially for homeowners over the age of 62 who want to continue enjoying retirement without cutting back on meaningful experiences like travel, lifetime gifts to children and grandchildren, and sponsoring treasured multigenerational family vacations. If you fall into that category and own your home outright or have only a modest mortgage remaining, there may be a potentially powerful solution available to you. One strategy worth examining is the thoughtful use of your home equity to support your cash flow needs. The equity in your home can be tapped tax-free to create a liquid reserve, provide a steady monthly income stream, or serve as a buffer during periods of market downturn. You can draw on it only when needed, or structure it to provide supplemental income without dipping into your investment portfolio. In essence, it allows you to utilize a portion of your home equity to support current or future spending in retirement. This idea is not new, and it's not fringe. Even the most aggressive variation of using the equity in your house for income―a reverse mortgage―is a $1.93 billion dollar market that is projected to grow to $3.2 billion dollars by 2033. In a prior Forbes article, Let Your Home Pay for Your Roth IRA Conversion, I explored how, in certain circumstances, home equity could be used to fund tax-saving strategies without increasing IRA withdrawals. At first glance, these ideas might seem counterintuitive, especially to those of us who grew up believing that the ultimate financial milestone was owning your home free and clear. But in many cases, using your home as a financial safety valve may offer more freedom, flexibility, security, and peace of mind than you previously imagined. Let's look at how this works in practice. You could take out a home equity line of credit. A HELOC gives you access to tax-free funds if the need arises in the future. If the market goes down and you want to avoid drawing from your portfolio, you can borrow from your HELOC to cover living expenses temporarily. Applying for a HELOC can be a relatively low-cost and noncommittal transaction. Of course, once you draw from it, you must begin making payments. These typically start as interest-only and later include both principal and interest. Another strategy, one that often receives more skepticism, is taking out a reverse mortgage. But before we evaluate the pros and cons, let's start with a couple of real-world examples with identifying details changed to preserve confidentiality. One of my clients got a reverse mortgage that has paid him $2,000/month for over 20 years and he will continue to receive that payment for the rest of his life. That monthly income allows him to stay in the home he loves and fund the lifestyle he enjoys. Let's say he lives another 10 years and dies in his home. He will have spent an additional $540,000 during his retirement, and when the house is sold, the loan is satisfied, and the remaining equity will be distributed to his estate. The estate will be smaller, but the income gave him the freedom to enjoy his life and help out his kids while they were younger. Another client, recently widowed, lived in a high-maintenance condominium that she loved. After her husband's prolonged expensive illness, her savings were no longer sufficient to cover taxes, insurance, condo fees, and other living expenses. A reverse mortgage allowed her to stay in her home and live comfortably, even if she lives beyond age 100. Before I go any further, let me be clear: a reverse mortgage is not the right move for everyone. But for some retirees—particularly those seeking additional monthly income or access to liquidity without tapping investment accounts—it might be a powerful tool. At the very least, understanding how reverse mortgages work can provide peace of mind just knowing that a back-up option exists. So, what might this actually look like? Let's walk through a couple of realistic examples, using current numbers. A married couple, both 70, own their home outright and want to supplement their monthly income by about $2,000 without drawing down their IRA or brokerage accounts. Here is what a reverse mortgage could provide based on current conditions: Even if the loan balance grows significantly over time due to compounding interest, any remaining equity after the home is sold belongs to the couple or their estate. And thanks to FHA insurance, if the home sells for less than the loan balance, the estate and heirs are not responsible for the shortfall. At age 80, a couple would qualify for more favorable terms because reverse mortgage payouts increase with age: As in the earlier scenario, an unused LOC will continue to grow, providing a flexible and inflation-resistant source of funds. Reverse mortgages aren't just for million-dollar homes. A fully paid-off home worth $440,000 would support a $1,000 per month payment for life under current assumptions. For a financial strategy to 'work,' it must pass both the math and the stomach test. Our office 'ran the numbers,' and the analysis supported a strong return from the home equity strategy. But the wife wasn't comfortable with the idea. They worked and sacrificed for 30 years to get their mortgage paid off. That was the end of the discussion. Two CPAs I work closely with reviewed this article before publication. They agreed that the strategy makes sense in the scenarios presented and saw the potential value of using a reverse mortgage under other appropriate conditions as well. Their main caution was cost: the upfront fee of roughly $33,700 is significant. If the line of credit or income stream is never used, the benefit may not justify the expense. That said, when integrated thoughtfully into a long-term cash flow plan, especially as a hedge against market volatility, the strategy can offer real advantages. There are several reasons. You are essentially locking in access to a tax-free source of funds that grows over time and does not require repayment as long as you remain in the house. The loan amount or income stream can increase, even if housing prices stagnate. The LOC can serve as an emergency reserve or supplement your income at a time when other buckets (like stocks) are temporarily down. And the closing costs can be financed. Not all reverse mortgages are created equal. As with anything, costs, interest rates, and terms vary widely among lenders. The difference can significantly impact how much you can borrow and how much equity is eventually retained by you or by your heirs. Comparison shopping is essential. For illustrative purposes, the rate assumptions and loan calculations in this article were based on information provided by Craig Schweiger, a reverse mortgage specialist familiar with FHA-backed HECM structures. I do not receive compensation for referring readers to Craig or any other provider. Using the equity in your home to finance additional spending could be a valuable option for many retirees interested in protecting their portfolios while preserving their lifestyle. Even if you never use a HELOC or reverse mortgage, knowing they're available can boost your confidence and reduce the pressure to sell investments at the wrong time. Disclosure: The views expressed are those of the author and do not necessarily reflect the views of Forbes. This article is for informational purposes only and should not be construed as legal, tax, or financial advice. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful, or that markets will recover or react as they have in the past. Please consult your own advisors before making any financial decisions.
