LTA excess options to consider As the lifetime allowance (LTA) has reduced more people have to decide the options they have concerning any excess they may have. Below are basic examples of options a client may consider utilising to account for these excesses. We have assumed growth rates for taxed s are 1% less than gross s (i.e., ISA and offshore). In all cases we have used an example excess of 100,000 with the client as a higher rate tax payer and with an IHT liability. Obviously these examples are only representative and scenarios will vary for individual clients. It is possible with all these scenarios to mix and match options for both the tax charge and investments. These are for illustrative purposes only and should not be seen as constituting giving advice. 1. Age 65. 100,000 excess not crystallised and left within the. 2. Age 65. 100,000 excess crystallised today and taken as income from the. 3. Age 65. 100,000 excess crystallised today and left in the with no income from the. 4. Age 65. 100,000 excess crystallised today and taken as a lump sum. Client leaves in their estate. No income taken and invests into collective or onshore bond. 5. Age 65. 100,000 excess crystallised today and taken as a lump sum. Client leaves in their estate. No income taken and invests into offshore bond or ISA. 6. Age 65. 100,000 excess crystallised today and taken as a lump sum. Client leaves in their estate and spends it. 7. Age 65. 100,000 excess crystallised today and taken as a lump sum. Client gifts to trusts or outright to individuals.
Age 65. 100,000 excess not crystallised and left within the. Residual Income tax to be paid on residual Further test at Fund value 100,000. Nil. No. 100,000. 40% But no income taken. Yes on excess value. As no income has been taken we can assume growth is 5%. LTA test on uncrystallised s and excess. Income/lump sum to beneficiaries tax free after excess s. No further LTA test. Income/lump sum taxable at beneficiaries marginal rate. If die at age 65 the of 100,000 will be an excess and taxed at either 55% with the lump sum paid out tax free ( 45,000) or 25% with the residual remaining in the and paid as income, tax free ( 75,000). If reaches with growth rate of 5% value is 162,889. Taxed at 25% leaves value 122,166 for dependants/ beneficiaries income. No taken at this point As the is being kept within the it does not form part of the estate. As no income was taken there will be no tax liability but note this will be considered at and also on death after. This test is on the excess value still held within the. Any growth will be seen as an additional excess and taxed at 25%. As the s have already been crystallised there is no further test and no test on growth. The beneficiary may be a lower rate tax payer. As may also inherit other assets, they may not take this income and retain it in the scheme and pass it on their death to their children. If this is the case and they die under this may be tax free. These s are still outside of the estate. They will be taxed as income on the recipient beneficiary if death after at their marginal rate of tax.
Age 65. 100,000 excess crystallised today and taken as income from the. Residual Income tax to be paid on residual Further test at Fund value 100,000. 25% 25,000. No. 75,000. 40% 30,000. Yes on value growth. As income has been taken assume both growth and income taken are the same at 5%, so no growth 0.00. No further LTA test. Income/lump sum to beneficiaries tax free. No further LTA test. Income/lump sum taxable at beneficiaries marginal rate. After taxes totalling 55,000 the value at is 45,000. As the is being kept within the it does not form part of the estate. This is based on the original value and does not include growth. This test is on the growth only of the still held within the. Any growth will be seen as an additional excess and taxed at 25%. Any growth taken out of the and spent will not be tested. As the s have already been crystallised there is no further test and no test on growth. Although there seems to be a disparity between the beneficiaries potential benefits before and after, it should be noted that the beneficiary may be only a basic or lower rate tax payer. As they may have also inherited other assets, they may not take this income themselves but retain it in the scheme and pass it on their death to their children. If this is the case and they die under this may be tax free. These s are still outside of the estate. They will be taxed as income on the recipient beneficiary if death after. Remember, the client has also had income during their lifetime.
Age 65. 100,000 excess crystallised today and left in the with no income from the. Residual Income tax to be paid on residual Further test at Comment 100,000. 25% 25,000. No. 75,000. 40% But no income taken. Yes on value growth. No further LTA test. Income/lump sum to beneficiaries tax free. No further LTA test. Income/lump sum taxable at beneficiaries marginal rate. Client dies at 65 value is 75,000. Client dies at 75. Assuming taxes of 36,791, value is 110,376. As the is being kept within the it does not form part of the estate. As no income was taken there will be no tax liability - but note this will be considered at and also on death after. This test is only on growth of the held within the. Any growth is seen as an excess and taxed at 25%. Assume a growth rate of 5% the value is now 122,167. This represents growth of 47,167 taxed at 25% = 11,791. As the s have already been crystallised there is no further test and no test on growth. Although there seems to be a disparity between the beneficiaries potential benefits before and after, it should be noted that the beneficiary may be only a basic or lower rate tax payer. As they may have also inherited other assets they may not take this income themselves but retain it in the scheme and pass it on their death to their children. If this is the case if they die under this may be tax free. These s are still outside of the estate. They will be taxed as income on the recipient beneficiary if death after. Remember the client has not had the use of any income.
Age 65. 100,000 excess crystallised today and taken as a lump sum. Client leaves in their estate. No income taken and invests into collective or onshore bond. Residual Income tax to be paid on residual Further test at Comment 100,000. 55% 55,000. Yes 45% 45,000. Nil. No income taken. No. Not and forms part of the estate at on death. Not and forms part of the estate at on death. If dies at age 65 the total taxes are 73,000 leaving a residual after tax of 27,000. If dies at 75 with growth total taxes are 81,644 leaving a residual after tax of 39,966. This will now be considered at the point of death. As no income taken there will be not be any tax liability. However, investing into collectives or bonds may incur other taxes. This is no longer part of the. Assuming dies at age 65, 45,000 will form part of the estate and be subject to IHT at 40% = 18,000. Assuming invested in a bond or collective with a growth rate of 4% at value would be 66,610. Subject to IHT at 40% = 26,644. This would now be distributed in line with the Will.
Age 65. 100,000 excess crystallised today and taken as a lump sum. Client leaves in their estate. No income taken and invests into offshore bond or ISA. Residual Income tax to be paid on residual Further test at Comment 100,000. 55% 55,000. Yes 45% 45,000. Nil. No income taken. No. Not and forms part of the estate at on death. Not and forms part of the estate at on death. If dies at age 65 the total taxes are 73,000 leaving a residual after tax of 27,000. If dies at 75 with growth total taxes are 84,320 leaving a residual after tax of 43,980. This will now be considered at the point of death. As no income was taken there will be no tax liability. However, investing into collectives or bonds may incur other taxes. This is no longer part of the. Assuming dies at age 65, 45,000 will form part of the estate and be subject to IHT at 40% = 18,000. Assuming invested in an offshore bond or an ISA with a growth rate of 5% at value would be 73,300. Subject to IHT at 40% = 29,320. Gross roll up will give a better value and the inheritable ISA allowance would allow the inherited ISA to continue to grow tax free.
Age 65. 100,000 excess crystallised today and taken as a lump sum. Client leaves in their estate and spends it. Residual Income tax to be paid on residual Further test at Comment 100,000. 55% 55,000. Yes 45% 45,000. Nil. None as after tax charge this is not subject to income tax. No. Not and forms part of the estate at on death. Not and forms part of the estate at on death. If dies at age 65 the total taxes are 55,000. As the client has spent the money there are no further taxes to pay but also no residual value. This will now be considered at the point of death. The initial 55% tax charge takes into consideration the return of tax that HMRC want and so these residual s are not seen as income taxable. This is no longer part of the. Assuming dies at age 65, the client has spent the monies (holidays etc.) and so no value to the estate (possibly some value for purchases like a car etc.) = 0. Assuming dies at age 75, the client has spent the monies (holidays etc.) and so no value to the estate (possibly some value for purchases like a car etc.) = 0. It has been assumed the purchases were of very low value or valueless and that no gifts have been made.
Age 65. 100,000 excess crystallised today and taken as a lump sum. Client gifts to trusts or outright to individuals. Residual Income tax to be paid on residual Further test at Comment 100,000. 55% 55,000. Yes 45% 45,000. Nil. None as after tax charge this is not subject to income tax. No. Not and forms part of the estate at on death. Not and forms part of the estate at on death. The initial tax charge of 55,000 will apply in both cases. If dies within 7 years* of making a gift the 45,000 investment will be subject to IHT at 40% = 18,000 so total tax charge 73,000. If dies after 7 years there is no additional tax charge so total tax 55,000. In both cases as gifted there is no residual value. This will now be considered at the point of death but only if within 7 years of making the gift. The initial 55% tax charge takes into consideration the return of tax that HMRC want and so these residual s are not seen as income taxable. This is no longer part of the. Assuming dies at age 65 or within 7 years* of death the original value of the gift will form part of their estate for IHT (excluding any growth), so 45,000 at 40% = 18,000. * tapering relief may apply As is greater than 7 years from making this gift, it will not be taken into consideration for IHT calculations. Any gift and growth will not form part of the estate. As these s were gifted immediately it needs to be noted that either the gift crystallised the value (i.e. growth will not be considered) or the gift and growth will be outside of the estate after 7 years. *tapering relief may apply