Reducing inheritance tax liability - how much money do you need?

[Quitso]

Without going into too many personal details how much capital/income would a couple late 70s need to retain ownership of to meet future needs and expenses?

Base Income from pensions is £35,000 joint per year, plus additional rental income, dividends, capital drawdown from assets. These assets bring a significant inheritance tax liability, hence the wish to gift a portion.

This is being driven by the couple in question, can get plenty of advice on what to do but my query is how much is enough.

No plans for any major expenditure, fancy holidays, new car etc. Health ok but not great.

I'm not looking for a discussion on merits of inheritance tax. My priority in this scenario is that there is sufficient income & assets to meet needs.

There's a tax exemption. You can slowly gift regular amounts to, say, your children of any amount but it must be from Income. Not savings. These gifts are free of IHT as long as they fulfill certain conditions.

Check with your accountant.

If you find you need the income you can stop the regular gifts.

But that is I am afraid a how long is a piece of string question? How much are their current outgoings in the home they currently live in? How much are they likely to increase with current economic circumstances? Without knowing their liabilities How can anyone say. They need a buffer to pay for any repairs etc at their rental property. What other outgoings are there for that property and what is their income tax liability?

Do a budget and factor in hefty increases in cost of living.
If either one of you dies, what will be your pension income? Will it affect your other income? Will your expenditure remain the same or reduce?
Look at assets that remain yours but could fall outside of your estate (immediately or after a period of time). Do you have pension pots remaining or are you receiving a guaranteed pension/final salary pensions?

Nobody knows what the future holds. Money may be needed for long term care.

You say no intended major expenditure, but do bear in mind the cost of future care. DFIL was in a care home for 4 years. It was £1800 per week. Luckily he could find the £400000 from his annuity and investments, as selling properties ( which he truly believed he’d soon be living in again) would have been a nightmare.

Having been through this situation , I’d suggest at least £500000 ‘float’ if they have it.

This article is pretty good, I would have thought their pensions income alone even if they divested themselves of all other assets (not to be recommended) would provide them a good standard of living if they don't want to be taking luxury holidays and so on, but of course everyone's standard of 'basic', 'reasonable' and 'luxury' is totally different, try telling Bill Gates that £35k a year is luxury for instance! I'd recommend they do a good honest look back on what they've spent on average in the last say 5 years (2020 and 21 unlikely to be truly representative due to lockdowns), take the highest figure and then use the many online calculators to work out what they need to continue to generate that as an annual income.

Then of course they need to consider what capital they need to keep in reserve, obviously you'd want to account for any major repairs and adaptations potentially needed to the house (perhaps minimal now but they could easily end up living there for 20 years or more so do account for the fact roof may need replacing, boiler may go, appliances need redoing and they will probably want things like a stair lift and accessible bathroom doing - budget at the higher end to get these things done properly). Then of course there's care costs, some people of course want to run down their capital to below the means tested threshold so that the state will meet all their care costs if required, won't comment on the morals of doing that but they should be realistic that state provided care whether at home or residential is very much the bare minimum to keep body and soul together, it's a pretty miserable existence TBH, to be honest if I had the option I would want to keep enough money back to fund ideally extra carers and services like cleaner, meal service, laundry etc to keep me/relatives functioning well at home, or if residential care became necessary, at least a slightly nicer home - as PP says this can get quite expensive even for non top of the line care, so if possible I'd keep at least £500k equity or capital available purely for care costs, potentially more for a couple.

@Mosaic123

There's a tax exemption. You can slowly gift regular amounts to, say, your children of any amount but it must be from Income. Not savings. These gifts are free of IHT as long as they fulfill certain conditions.

Check with your accountant.

If you find you need the income you can stop the regular gifts.

This is true, however if any of their investment income is from bonds, then they can not gift this, as it is classed as return of capital.

Sounds like way too complicated case to solve on an internet forum OP

Thank you all. Absolutely agree it's complicated but even the figure of £1,800 x 52 weeks x 4 years for care home fees is a useful indicator.

Fortunately house doesn't form that large a portion, so there's plenty of scope for retaining decent assets up to the 1 million inheritance tax threshold, and even above that, question is the trade off above the threshold.

Agree that care should be self funded. Don't necessarily agree that hundreds of thousands should be paid to the treasury when it's be hard earned (and pertinently saved, and no luxuries spent to do so).

Keep enough to fund potential care needs, and depending on your area it could be in excess of £2,000 per week. We had to rent out my DMs property and drain all her savings to pay for her care.

Anything you give away more than 7years before death is not part of your estate so gift early if possible and if funds not needed for care

@Quitso

Thank you all. Absolutely agree it's complicated but even the figure of £1,800 x 52 weeks x 4 years for care home fees is a useful indicator.

Fortunately house doesn't form that large a portion, so there's plenty of scope for retaining decent assets up to the 1 million inheritance tax threshold, and even above that, question is the trade off above the threshold.

Agree that care should be self funded. Don't necessarily agree that hundreds of thousands should be paid to the treasury when it's be hard earned (and pertinently saved, and no luxuries spent to do so).

It is not a million threshold, you can not make up the shortfall in the Residential Nil rate band with other assets.

They each have £325k - so £650k for a married couple. Plus UP TO £350k for the RNRB, any surplus can not be offest against other assets in the estate.

So it would be 'unfortunate' for the house not to make up a large portion of the estate.