It is better to give, than to receive a painful tax bill

Financial Makeover

Name: Frances PitcairnAge: 70Occupation: Local councillor

Name: Frances PitcairnAge: 70Occupation: Local councillor

Frances works as a local councillor in north-west London and has sufficient income to meet her modest lifestyle. However, the rise in property value has meant that her house is now worth more than £500,000. All her children have left home and have partners so she is considering whether to move.

The adviser: Tim Cockerill is the managing director at Whitechurch Securities, a firm of independent financial advisers based in Bristol. Tel: 0117 944-2266.

The advice: Her main problem, of course, is inheritance tax. With the current threshold at £231,000 her estate is going to suffer a hefty tax bill.

Frances needs to reduce her liability to inheritance tax, and she has started to address this problem. As far back as 1994 she began to give money in the form of gifts to her children. It is possible to give away as much money as you wish, and it falls outside your estate, providing you live seven years after the gift is made. In the event of death within the seven-year period, inheritance tax is charged at a reducing rate depending on how long ago the gift was made. One of the catches with inheritance tax is that it is charged at 40 per cent, irrespective of your income tax rate.

Since 1994, Frances has given away as much of her capital as she can. She is fortunate in that she has a number of pensions from previous employment and this, combined with her council work, provides sufficient income. Being quite sensible, she has left herself with enough money for holidays, a new car and a fund for emergencies.

Every year, you are allowed to make a certain amount of gifts without them being deemed part of your estate. Once again, Frances has been on top of things. The major hurdle, therefore, is how to make provisions for the value that is locked up in her house. The classic solution is to work out the amount of tax likely to be owed. Let us take an approximate figure of £100,000. Take out an insurance policy, paid by monthly premiums, to cover that sum. This is written in trust so that at the time of death the insurance policy pays out a sum equivalent to the amount of tax being deducted out of the estate. The only drawback is that by the time most people start thinking about this problem they are of an age which makes premiums expensive. Whole-of-life assurance for £100,000 would cost Frances £180 per month and she simply cannot afford it.

A partial solution would be to move to a smaller house. Frances has decided that she does not need such a large home and would be able to release around £100,000 which could then be gifted to her children. In an ideal world Frances would move to a house worth, say £200,000, and gift the capital raised. But she wishes to remain in the same area because of her job and property prices do not allow for this option.

One way to solve her dilemma is through a "home income plan" but this requires careful consideration. For the purposes of this exercise we will assume Frances is not moving and has at present a liability to inheritance tax of £100,000. She could arrange, through a Home Loan scheme, to raise equity against the value of the house. This is then used to purchase an annuity which in turn generates a monthly income.

Home Loan schemes allow for up to 25 per cent of the value of the property to be raised in this way. Frances could therefore raise £125,000 and, if we assume an interest rate of 7.5 per cent net, this would generate an annual income of £9,375. She would now be in a position to take out an insurance policy using the annuity payments to fund the premiums. This policy should be written in trust so that it is outside the estate and will be written to cover the inheritance tax liability. Obviously, the company arranging the loan will need to be repaid and that will come about through the sale of the property, so overall, the potential inheritance tax bill is reduced.

Taking this procedure one step further, Frances does not have to raise 25 per cent of the property value, she could raise 10 per cent so that, with a little bit of careful calculation, she could arrange for a loan against the property which generates enough income to cover the premium for the life policy, leaving almost no excess income. This then leaves more of the house value to the children while covering the inheritance tax liability.

A final option is for the insurance premium to be paid for by the four children, all of whom are working. I am afraid that it is all rather convoluted and needs to be considered carefully, but it is one potential solution to Frances's problem.

Independent Partners: 10 top tips for retirement. Get your free guide here

i100 In this video, the late actor Leonard Nimoy explains how he decided to use the gesture for his character
Arts and Entertainment
Secrets of JK Rowling's Harry Potter workings have been revealed in a new bibliography
arts + ents
Down-to-earth: Winstone isn't one for considering his 'legacy'
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: HR Benefits Manager

    £40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

    Recruitment Genius: Office Manager / Financial Services

    £30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

    Jemma Gent: Year End Accountant

    £250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

    Jemma Gent: Management Accountant

    £230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

    Day In a Page

    HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

    Scientists hail daily pill that protects against HIV infection

    Breakthrough in battle against global scourge – but will the NHS pay for it?
    How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

    Time to play God

    Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
    MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

    MacGyver returns, but with a difference

    Handyman hero of classic 1980s TV series to be recast as a woman
    Tunnel renaissance: Why cities are hiding roads down in the ground

    Tunnel renaissance

    Why cities are hiding roads underground
    'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

    Boys to men

    The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
    Crufts 2015: Should foreign dogs be allowed to compete?

    Crufts 2015

    Should foreign dogs be allowed to compete?
    10 best projectors

    How to make your home cinema more cinematic: 10 best projectors

    Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
    Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

    Manchester City vs Barcelona player ratings

    Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
    Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

    Monaco: the making of Wenger

    Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
    Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

    Chris Gayle: The West Indies' enigma

    Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
    In Ukraine a dark world of hybrid warfare and murky loyalties prevails

    In Ukraine a dark world of hybrid warfare

    This war in the shadows has been going on since the fall of Mr Yanukovych
    'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

    Homage or plagiarism?

    'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
    Broadchurch ends as damp squib not even David Tennant can revive

    A damp squib not even David Tennant can revive

    Broadchurch, Series 2 finale, review
    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

    Inside the mansion of Germany's 'Bishop of Bling'

    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower