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Dentists Who Invest

Podcast Episode

Full Transcript

Dr James: 0:43
Welcome back to the Denysuniverse podcast with Returning Face IFA John Doyle. We are here today to talk everything in heritance tax, because it’s actually not something that we’ve ever properly done on the Denysuniverse podcast Somehow. I’d like episode 187 or whatever. This is because it’s kind of important stuff, especially if you’ve got a decent chunk of money tied up in your estate, as lots of dentists tend to do when they get towards an end of life. You know one of my friends, luke Hurley, who formerly was an IFA. He was saying to me that the interesting thing about dentists is most of them have over-saved when they got to the end of their life. Most of them have too much money in vertical commas, so to speak, depending on what their objective is or their goal is, but certainly what he means by that is they could have been financially free much sooner. But, what that also means, of course, is that if we don’t plan properly, then we’re going to give a lot of that money and wealth to the tax man rather than our family.

Jon: 1:40
Yeah, it’s a really interesting one. We’re going to dive into lots of areas of this, but yeah, I think it’s definitely one of those. When we’re sitting down with clients, the first question we want to ask is are we going to run out of money and try and work out that one? And then it’s, are we going to dive too much money and make sure we’re not going to end up there either? And it’s balancing those two priorities off against each other, isn’t it? So yeah, inheritance tax is definitely an area that people come and ask us about. I find two things, though. One, we get asked about it too early. We get clients in their 40s asking us about inheritance tax planning and wanting to do lots of drastic things. Or people think about it far too late and they come to us on the deathbed trying to sort out inheritance tax planning. So I guess the thing is a big topic, james, where do you want to start?

Dr James: 2:39
Where do you want to it’s a big old juicy meeting. Well, do you know what? Here’s something that popped into my head when you were talking Just now. You were saying there’s too early and there’s too late. What’s the sweet spot? What’s the golly loxone for considering how you should plan your affairs for inheritance tax?

Jon: 2:57
Yeah, I think the first thing to do is just have an understanding of your current situation, because a lot of the time when we get initial questions about inheritance tax, they’re from people who they don’t have an inheritance tax problem. Okay, so first off, we have an individual allowance of £325,000 that we get there for inheritance tax purposes and then we get a principal primary residence, so a main property allowance of £175,000, giving an individual, broadly speaking, half a million. Most people are particularly dense as well, have a house worth £175,000 or more, so half a million pounds for an individual. A lot of the time we’ve got couples coming to us who’ve got a million quid as a couple. So the first thing to do is get an understanding of. Do we have a problem? Is our estate worth more than a million quid? Beyond that is then what is the taxable estate? Because pensions are outside of our estate for inheritance tax. So if we’ve got a million quid plus a load of pensions, we don’t have a problem. And business assets outside of our? They’re sort of an exemption for business assets for trading companies, not a property company or an investment company, but an, you know, like a dental practice that has an exemption for inheritance tax as well as business relief. And so you know, the first thing we’ve got to do is actually understand what’s in our estate and do we have an inheritance tax problem? Second thing we’ve got to work out is when are we going to run out of money? Because we might have just about enough money to live the life that we want to live and we don’t really want to be giving away money before we’ve even had a chance to enjoy it ourselves. So for me, I kind of have this phrase that I use with clients when we’re talking about inheritance tax that the general principle is spend it, gift it and give it Okay, and then we’ll start worrying about it. Probably mid 70s, something like that. So that general principle is spend it. You’ve got an inheritance tax problem and you’re under 75. There’s probably a lot of spending that we can do. We can retire that bit earlier if we want. We can travel business rather than cattle or economy. We can maybe go and get the car that we want instead of the sort of sacrifice car options that we want Basically, spending the money to meet our values and our aspirations. Secondly, give it. I find there’s a lot of people hold back money from their family until too late, how many of us could have done with our inheritance. Those of us inherited some money could have done with it 10 years earlier. And so when we’re talking to clients and they’ve got kids in the 20s, 30s, 40s, so okay, let’s have a giving plan. Let’s not try and give it all away. Let’s have a giving plan, whether that’s 10 grand a year, 50 grand every five years, whatever the amounts are that work out for our life, the giving plan and then gift it. We can give the money away and then we can start thinking about, once we’ve done all of that, all the complicated inheritance tax planning we might get to. Yeah, I love that. So I mean, it’s like I said, there’s a big topic that we’re going to dive into, but that’s a sort of a general overview of where we might go.

Dr James: 6:45
And one. Did you mention gift. Was there one more, or did I miss that?

Jon: 6:48
Give it so we can think about philanthropy, like giving to charity and causes that we really care about, Because you know, if you’ve got excess wealth might as well feel good about giving some of that money away, Right.

Dr James: 7:03
Got you. Okay, cool, Awesome. Well, good to know. I actually didn’t know that about the dental practice thing. And so far there’s an exemption on trading companies.

Jon: 7:13
Yeah, so dentist who invests mate, that’s going to be a trading company and something there.

Dr James: 7:21
Oh, there you go. So, james Jr, when he comes along, he’s going to air tax for it. It’s a terrifying thought, james Jr. Oh, wow, two of us. Can you imagine that? Cool, cool, cool, cool, cool, cool. Well, listen anyway. So you said that there is a grace, you know a grace amount of 365, was it that you said 325. 325. And then, above that, what happens?

Jon: 7:51
So let’s go with. We’ve got the 325, and then we’ve got the property amount, you know, of 175, which goes against your primary residence. So for most people they can get half a million. Okay, beyond half a million, if you’re a single person or you’re not married or in a civil partnership, then there’s a tax of 40%, okay. So if you’ve got, if you’re a single person with an estate of a million quid, you’re going to pay 40% on half a million of that, okay, which is 200,000. So of your million quid, your beneficiaries would inherit 800,000 and the state would take 200,000.

Dr James: 9:27
I see, unless we plan effectively right.

Jon: 9:31
Yeah, unless we plan, unless we do a bit of planning and a bit of thinking. And this is where that question about knowing, having your financial plan in place and knowing you know your own needs financially throughout your life is really important, because you know you might need all of that money in your lifetime and it might just be that we need to do some very simple things in order to mitigate some of the cost to your estate of inheritance tax. So some of those simple things that you might look at doing. If you kind of want to kick the can down the road and say I’m too young to be giving it away and I’m going to spend it, but I still don’t want my family to pay this money, one of the easiest things we can do is look at ensuring the risk. You can just take out some life insurance that will pay out the amount to make sure there’s no inheritance tax payable. And we tend to do that with people who are, you know, relatively young so under 70 and relatively healthy as well, because it can be a very cheap and cost effective way to do it and it just kind of solves the funding issue, I guess, and that you then start moving into the realms of trusts and people will have heard about trust planning for inheritance tax purposes and it can feel quite slippery trust and it can feel quite complex and there are a number of different ways to structure a trust for inheritance tax purposes. But in essence, what you’re doing with the trust is you’re giving the money away to another entity and then having some elements of control over how and when that is spent. Okay, so you can give your money into a trust and then that can be directed towards your family’s needs. But for it to be effective for inheritance tax purposes, you can’t maintain any benefit from that trust. So the classic question we get all the time and the big big common mistake is can I put my home into trust and still live in it? Yeah, and not pay rent, but effectively, then what you’ve got is what we call a gift with reservation. You’re actually giving the money away, giving the house away, but still benefiting from it by not paying rent, and therefore it fails this gift with reservation test. Okay, and the easy way to think about this is you know, if you’re sad at home and you’ve got an expensive painting on the wall, you can’t go. That’s now little Jimmy’s, but it’s going to stay there on my wall. You’ve not actually given it away, have you, because it’s still in your house and you’re still the one using it. And it’s exactly the same with your property. You can’t sign it over to your children and still living it rent free. You’ve got two choices you either don’t sign it over or you sign it over and you pay a market rent on your property. So trust planning comes with a restriction then on what you can use that asset for for your own benefit. Going forward, it can get quite complex and quite messy.

Dr James: 13:12
Got you, is it anyway? What’s the like tradition? There’s a way around that, though, right, or is there anywhere around that?

Jon: 13:20
In what way?

Dr James: 13:22
I suppose what I mean is trying to transfer as much as we can or certain assets to our kids outside of that seven year. Yeah, yeah, I’ve heard off before. Yeah.

Jon: 13:36
This is the giving it away. Okay, so the easiest way to pass on your estate is just to give it all to your kids early and live seven years and there’s absolutely no restrictions is called a potentially exempt transfer. You can give your family as much money as you want, but it has to be then theirs. You can’t. It’s not alone, it’s not a. I’ll have it back if I need it. Yeah, it’s a gift in the truest sense of the word. And then over the seven years, the amount of it that’s taxable in your estate reduces and then it’s their money and there’s no inheritance tax payable at all. Okay, yeah. So that’s just a straight gift and that’s part of the give it, spend it, gift it, give it. Rules that I have is spend it and then give it to you or gift it to your family.

Dr James: 14:37
Right, or you could gift it and then potentially pay the new landlords rent, I suppose, as tenants.

Jon: 14:47
You could, if you’ve got so, for example, that either. Where we might look at doing something about is someone who’s got very high pension income from like an NHS pension.

Dr James: 14:57
Yeah.

Jon: 14:59
If you’re someone who’s got like a massive 1995 scheme. You’ve got a husband and wife. Both were in the NHS scheme. We’ve got a hundred thousand pounds worth of income coming in, guaranteed index link for the rest of our life. Well, you can’t give that income away, but you could give the property away and pay. Then the market rent. Where it often comes unstuck is most people who are living in properties that they with an inheritance tax problem. That property is several hundred thousand pounds, if not a million quids worth of property or more. The market rent on a property like that is many, many thousands of pounds a year. You’re then committing yourself to paying for five thousand pounds a month in rent from your net income for the foreseeable All your children could just pay tax on the rent that they would have received.

Dr James: 16:04
I see Okay, so some potential solutions depend on circumstances.

Jon: 16:09
Yeah, generally speaking, I try and talk people out of that kind of stuff because it’s very drastic, it’s restrictive, it kind of cuts a lot of options off down later in life for you. You know, particularly around your house. There’s maybe other solutions that we could look at that would be better or more flexible. There’s lots of people who kind of flog trust planning for houses and they cost tens of thousands and they’ve all failed when they’ve been tested in court or they’ve ended up with huge problems. You know you then can’t move or downsize without permission from your children and you’ve got no access to this capital. You can’t do equity release. You can’t. You know there’s all sorts of complications that come with it and restrictions. You’re better off finding particularly if you’re sort of when I say young under 75, more flexible options such as get planned, gifting of assets, clever use of the assets you’re going to spend in your retirement. So we’ve got a number of our clients where they’re private pensions not using them at all and we’re spending ICES, we’re spending other investment accounts first and leaving the pensions because they’re outside of the estate as intergenerational planning. So that kind of thing where we’re spending the taxable estate and leaving the non-taxable estate to pass on. You can do that sort of stuff really well. It’s really effective, but you still have control and access to your money, so we’re not kind of leaving you hamstrung down the line.

Dr James: 18:03
That’s actually really flipping cool. What are the rules? Because this is something I’ve come across before Pensions have these really crazy rules where it’s like you invest in the pension and then should you perish or leave this earth before you’ve had time to receive all of the benefits from it the monetary benefits then what happens is they’re passed on to next of kin and it’s tax-free and they get benefit from it. What’s the rules on that? I’m interested.

Jon: 18:32
We’re very definitely here talking about defined contribution pensions. So when we’ve got a pot of money, defined benefit like the NHS scheme is a bit different. But for a defined contribution scheme under the age of 75, you inherit it completely tax-free. There’s no, and that can either be in your pocket inherited, or you can, more commonly, have a dependents pension where it’s just a pension in your name as a spouse or a child or whatever, and then it can be passed again, and again and again down the line. They can be almost permanent.

Dr James: 19:11
No way.

Jon: 19:12
Yeah, yeah, the way they work, depending on the size of the pension. Right Now we’ve got no lifetime allowance. For now you’ve got a position where multiple millions could be passed on down the generations If you die after 75, this is the really cool thing it’s only taxable at the marginal rate of tax of the person inheriting it.

Dr James: 19:40
Based on the income that it throws off, right, or is it the income? That it throws off is.

Jon: 19:45
Yeah, but they can manage that so you can leave it as a pension. They could use it to retire early when they’re not. There’s no sort of access age rules, right. So someone who’s 50, whose parent left them a pension could draw from that dependents’ 10,000 pounds a year tax-free if they have no other income, right. So it becomes a very flexible tool, almost like a trust. Very definitely. Pensions are just a kind of trust in many ways that have their own special rules and we’ve got this ability then to pass those on down the line. It all comes down to strategically thinking about the assets that we’re going to use to fund our lifestyle and the ones that we’re going to use to allocate towards other goals or things that are important to us.

Dr James: 20:42
That’s flipping amazing. So just a backtrack to that. So just to make this really hyper clear if you’re like 20 or 10, you can still withdraw from that pension. Yes, really, wow, okay that’s crazy. And then if you don’t touch it, it gets rolled on to your kids.

Jon: 21:00
Yes.

Dr James: 21:01
Right, and then they can have it whenever they want as well. So it’s like this pot of money that’s just intergenerational.

Jon: 21:07
It’s all dependent on when. The person, how it’s taxed, is all dependent on the person who owns it at the time, and then they can just be passed on generation to generation. But it can’t be gifted during the lifetime. It’s on debt. Yeah, yeah, yeah.

Dr James: 21:25
So that’s the first thought, and what was the other? So that’s, if you want to. You said that there was one method where you can use it as income continuously, should the person yeah, what was? The other method. What was the other?

Jon: 21:38
method you can choose. Just take it all as a lump Right. So if you’re like a dependent who’s inheriting a pension, you’ve got a mortgage you want to pay off. You could use it just to pay off a mortgage.

Dr James: 21:51
Really.

Jon: 21:52
Really.

Dr James: 21:54
And the fact that that’s unlimited. Is that related to the fact that there’s no lifetime allowance, right? So whenever that comes back, there’ll be tax on it above a certain level, presumably. Wow, is that what there was previously? Is that’s a better question?

Jon: 22:11
Yeah, yeah, all these rules will be up for grabs and I think potentially the death benefits might be something they look at. But the way it was treated historically is the person whose pension it was was tested against the lifetime allowance Right, and they crystallized and at 75, but it wasn’t tested on death ever. So if you died before touching it, there was no lifetime allowance test. Yeah, currently there’s no lifetime allowance, so we just have to play within the rules we’ve got on the day, right.

Dr James: 22:57
Fascinating. So everybody who’s listening, just to give you guys some context, before John and I shot this podcast, what we did was we caught up a little bit about how the podcast would look and we both said that we would just shoot from the hip, really, and said that we talk about whatever came up which has been useful, and the conversations went here, here, here, here, here, here, here. So you know what? Let’s make this really tangible, john. As a final thing to wrap up or conclude all the things we’ve talked about, let’s take everybody on a journey whenever it comes to their inheritance tax planning, mm-hmm With me, and let’s do it like this. This just popped into my head while you were talking, just about Okay. You’ve got somebody who’s 40, what should they be thinking about? Obviously, broad strokes. Huge rule of thumb is this. Well, it’s very clear to make that a disclaimer to everybody who’s listening. But broad strokes, someone who’s 40, someone who’s 50, someone who’s 60, someone who’s 70, what? Should they be thinking about at each of those respective ages whenever it comes to inheritance tax.

Jon: 23:59
Well, I think all of them should be probably at least once a year, going what is my net worth? What assets do I actually have and in what places property, business, pension, et cetera. That’ll give you your net worth, which will give you an indication of actually what is your taxable estate going to be worth. All right, so you can then get a very quick rule of thumb do I have an inheritance tax problem or not? Okay, so remember, your debt is going to get taken off your estate. So if you’ve got a mortgage, your net worth is going to be property value minus mortgage. Okay, so that gives you your first rule of thumb. I’d say someone in their 40s, someone in their 50s, should really just be thinking unless their estate is in the multi-millions of just strategically thinking long-term about what money they’re going to need and are they going to have enough we don’t need to be worrying too much about other estate planning. But 60, or if your estate is getting up towards the sort of two, three million pound mark where we’re going to have some bigger things, then we might start thinking about a structured gifting plan. We’re gifting some money to beneficiaries or causes that are close to our heart. Then I tend to think with clients 70 to 75, we go more structured with this stuff. We might think then about very deliberate other planning that we can look at and all the crazy cool products and stuff that we can look at it’s not really going to be your audience, most of them net worth statement and then just really careful thinking about where we’re put in our investments and a really great will. There is so much clever stuff that you can do with a will. One day I’ll tell you about my will and what I’ve got in place for my kids and my wife, because there’s some really clever stuff in there for inheritance tax planning should ever happen. It not only protects it all from the tax man but also from that young gold digger who’s going to come after my wife if I go and going to protect the money from him and you can make sure it goes to my girls, not their husbands or partners or whatever either. You can do an awful lot of planning with a will.

Dr James: 26:43
Like and comment for an episode on John’s will. Guys, that is the next part. We’ve got to show some support. We’re going to see how much demand there is out there, especially from the 70-year-olds and 75-year-olds who are potentially listening to this podcast. And you know what, if you are out there, then wow, well, good for you guys. But yeah, I actually interestingly did some research on the average listener of the Denysian Invest podcast of the day. It displays on what’s that platform called Spotify. It shows you all the data. So the average is between 20 and 35, and they’re mostly male as well, which is maybe that’s just something about my energy, I don’t know, I can’t say. I can’t say, but you know what? But you know what? That’s totally cool, that’s fine. We want to make this as accessible for everybody as possible.

Jon: 27:35
While I think about it, there’s one other trigger that I want people to think about, and that is if you’re a practice owner, the moment you sell your business, it goes from something that is not taxable in your estate to something that is taxable in your estate, and that is a moment where you want to think about this as well. You know, if you come into a lump of half a million, a million, a million and a half, that wasn’t in your estate because it was a business asset, and now is great moment to start thinking about this stuff.

Dr James: 28:07
I was someone who messaged me the other day and they were talking about selling their dental practice and what they said to me was they said, jim, you know what? Nobody tells you about selling your dental practice. They never tell you at any point that you want to have any cash flow afterwards, right, and I was like, oh okay, interesting, yeah Well, I guess they never just really spelled it out and someone I never really put. This is the thing, because some people think, lots of people think out there that you can get like instant cash flow from your ISO et cetera, whereas the whole point is that you’re supposed to leave it to compound. So really, there’s a real opportunity to help Dennis understand finance better so that they can anticipate these things coming. Our resistance of Dennis University’s podcast is between 28 and 35. You are going to be well prepared for this inheritance tax thing whenever that comes along, because of this episode today and because of all the follow up episodes that we’ll do, especially that episode on John’s will. Let’s have that conversation Like that. John listen, really, really, really cool to have you on the podcast Once again flipping. A lot of your stuff is always top notch, really detailed and really hyper useful for Dennis Anything that you’d like to say just before we wrap up today.

Jon: 29:15
No, no, it’s all good. I mean, like you say, it was a shoot from the hip podcast. I’ve enjoyed it. There’s so much detail. You can get lost in the weeds with this stuff. Try to keep it very high level, but very happy to have a chat with anyone who’s wanting more info on this. They can reach out to me on the group or at Juniper John on Instagram and Twitter.

Dr James: 29:37
Totally, and just to make that hyper clear, john Doyle, feel free to find John on the Dennis St Pest Facebook group or on Instagram, as John has just said. John, listen, thanks so much for your time. Again, once more, I’m already looking forward to the next episode. My friend, we’ll speak to each other very soon. All right, speak soon, mate.