The Sandwich Generation – How To Make Your Money Go Further

PLEASE NOTE THAT NONE OF THIS IS, OR IS INTENDED TO BE, INVESTMENT ADVICE.

YOU MUST SEEK ADVICE BEFORE YOU INVEST.

THIS ARTICLE IS ABOUT THE TAX BENEFITS OFFERED BY HMRC FOR VARIOUS SCHEMES.

Are You in Your 40’s, 50’s or even 60’s?

Are You still financially supporting Your children but also funding Your parents?

If so, welcome to the Sandwich Generation.

Whilst there is some useful information on the internet (see for example this Market Watch article from 2015) this article focuses on those tax breaks HMRC generously give You but often people overlook.

Some of the following will be too late for some of You, but I hope anyone reading this will find something of benefit.

Starting point

My guess is You and Your spouse are working and earning under PAYE or perhaps are self employed.

Either way You are paying a shed load of tax.

Most of the tax collected in the UK comes from YOU, workers.

See the diagram, the red and green is YOU.

And a large part of the Blue, ok basically nearly all of it, is You too; every time You pay a utility bill, fill up with petrol, have a drink or go shopping.

[Source OBR]

So, You are probably saying we have no money to play around with tax schemes, but hear me out.

There are ways and means to everything.

Step One

Work out who is earning what, who has what and who needs what?

Who has savings, who does not?

Maybe some cost control is needed, like cancelling the direct debit for the SIM card that has not been used for years (ditto gym membership) etc.

Step Two

Think strategically about the future.

When You are retirement age how old will Your children be?

How old will Your parents be?

Do You have anyone in the family with special needs who needs a fund set aside for them?

If when You are 70 Your parents are going to be 110, then to be blunt, that is not going to happen, so what will happen to their wealth before then?

If when You are 70 and Your kids will be at University, how will they be funded?

From Your pension or their own resources or elsewhere?

For example, rather than funding university fees out of Your pension or retirement savings, start saving in the childrens’ names now, as soon as possible, as a priority.

Then at the very worst they will have funds to fund their education.

There is more about this below.

And even having sorted out Your current facts and worked out how old various family members will be at various key points in the future and their likely needs (dead people do not need houses, but maybe You might want to move into Your parents’ house?), where do You start?

Well it helps if the family gets on with each other.

If You are unfortunate to have a dysfunctional family (like me) then You have less support to call upon and fewer resources.

So, let’s start at the beginning.

MAKE A WILL!

Anyone who has been my to websites (this one as well as stephencoleclough.net and stephencolecloughblog.com cannot avoid the many and various articles about making a will (and a lasting power of attorney).

I make no apologies for this.

It is extremely important and not making one is extremely irresponsible.

Why?

Because:-

1. You are going to die. FACT. It is not an “if”, it is a “when”. I have many clients who believe that they are immortal and I say this to someone at least once a week. In the words of Lieutenant Alex Hopper in the film Battleship, “You’re going to die, I’m going to die, we’re all going to die… But not today”. Making a will is NOT tempting fate. Biology has already decreed that You will die, but hopefully not for a very long time and then peacefully in Your sleep.

2. If You are married / in a civil partnership, You are throwing away the most valuable tax relief there is, the spouse exemption from inheritance tax (IHT). Yes, estates can be varied up to two years after death (just ask the Millibands) but this is problematic if one of the beneficiaries is mentally incapable (which includes all under 18s), bankrupt or dies within the two years.

3. If You have a pension, or endowment policy or similar, make sure they are written in trust for Your next of kin so that they do not fall within the IHT net.

4. Contrary to popular belief, Your spouse does not get everything if You do not make a will. Your home might be in joint names, which is helpful, but as for Your other assets, a typical surviving spouse with children only gets the first £250,000 of Your estate. Hopefully You have already done step 2, but if not that death in service benefit might not go to Your wife and might also be eroded by IHT at 40%. If You want to find out what might happen to Your estate go to https://www.gov.uk/inherits-someone-dies-without-will.

5. Are You the parent or guardian of minors? If so, then if no provision is made about who will look after them up to age 18 and You and Your spouse both die together (it happens) or the survivor dies, then what happens to the children? Answer, they go into care. The person legally responsible for them is Your local authority. They become “Looked After Children” (LAC) and the responsibility of the state. The local authority can quickly foster the children out to a suitable relative, but only after checking them out and the place where the children will live. A truly great way to add to the trauma of an unexpected death. So, decide who You would want to look after Your children if the worst happened, talk to them, You don’t want it to be a surprise and appoint them as guardians in Your wills. Seriously? Would You wish this on children under 18?

6. If You run a business, alone or with others, it is a good idea to make provision for how those left behind should deal with Your business assets.

And make a lasting power of attorney (LPA)

Between life and death there is a moment of “gaga”.

With luck, this will be a fraction of a second and You won’t notice it.

But it could be for years.

If this were to happen, it would still be the case that only You can operate Your bank accounts and only You can consent to any medical treatment which might make You better.

But You are stone cold unconscious in a hospital bed.

An LPA enables You to appoint someone to do these things on Your behalf should You become mentally incapable of doing them for Yourself.

It is a bit of a process, and costs some money, but best to be safe.

Now that we have the basics in place, let’s look at tax.

Friendly Society Bonds

You do not have to start big.

You can start small.

Friendly Societies can offer a tax free savings bond which typically invests in the stock market.

It is tax free.

Entirely.

The catch is that each person, (including children) can only pay in a maximum of £25 per month.

However.

This will hopefully grow, tax free into a nice sum.

After ten years mine was worth over £10,000 from contributions of £3,000.

Money for the children (seems like a fair swap)

If You put money into a savings account for Your child, then the first £100 of interest per child is tax free.

With today’s interest rates that is very generous.

Our largest building society is currently offering up to 3.5% pa.

If a child has more than £2,857.14 in such an account paying these rates for a whole year then You will be taxable on the interest over £100.

However, if Your children are lucky enough to receive cash from relatives (other than mom and dad) then if this goes into a separate account, it is their money and they can use their personal allowance against it.

At £11,850 per person, a child would need to have £338,571.43 of savings for a year at 3.5% to pay tax!

I am not suggesting there is any risk of imminent insolvency but also bear in mind that the maximum that the Financial Services Compensation Scheme will pay out per customer per financial institution is £85,000.

ISAs, NISAs, LISAs, Help to Buy ISAs, Junior ISAs

“It is LISA with an S not LISA with a Zee because LISA with a Zee goes ZZZ not SSS…”.

After Gordon Brown’s demolition of the attractiveness of pensions, so much so they have become mandatory for employees, the new name of the game is ISAs (individual savings accounts).

These tax-free savings accounts can now be passed on to a surviving spouse.

I understand from pension advisers that anyone under 40 is ignoring pensions, and their work is advising those who have sizeable pots and want to protect or enhance them.

The various ISAs are riddled with slightly varying rules, but broadly speaking there are cash ISAs, and equity ISAs.

The latter usually has to be obtained via and independent financial adviser (IFA) unless You already have an ISA account.

The amounts that can be paid in are restricted and there are overlapping rules for 17 and 18 year olds who can achieve double allowances but for those who can put money aside for a rainy day, the amounts can accumulate.

Indeed, there are people who are now ISA multi-millionaires.

And again, there are ISAs for children.

Another great way to save for their college fees, drama school or whatever they want to pursue in the future.

Her Majesty’s Government needs money

The Government raises money in the wholesale markets by selling gilts.

Its retail arm, aimed at You and me, is National Savings & Investments, now known as NS&I.

They offer a range of products, some of which are tax free and some of which do not count as savings for a variety of purposes, e.g. student loans.

Having said that the government needs money, the current NS&I range is not as generous as it was with only the ISA, Junior ISA and premium bonds being tax free.

In the past there have been other tax free bonds and also tax free children’s bonds so please keep an eye out for new issues.

Premium bond prizes total 1.4% of the total fund pa.

The maximum a person can have is £50,000 and this usually produces a prize every month.

But if You are a person earning over £150,000 pa, Your top rate of tax is 47%, and a 1.4% return is worth 2.97% gross.

If You are in the horrid £100,000 to £150,000 bracket, then Your marginal rate is 62% and 1.4% tax free equates to 3.68% gross.

And it is guaranteed by the state.

Parents

“Your mom and dad, they fuck You up” wrote the great Philip Larkin, and today he would add, and You have to maintain their ever-increasing care costs.

Assuming they do not have assets, and if the do, giving them away can invoke tracing provisions for local authority care home funders to recover their money, then the chances are that some of Your post-tax income is funding Your parents’ needs.

Many elderly people are asset rich and cash poor, the asset being their home which was possibly the former family home.

A four bedroom semi-detached house in the South East of England can be worth a small fortune.

I have heard so many people ask whether they should have their parents give them the house now and if they survive seven years then there is no IHT.

Well that is correct if You are going to charge them a market rent for living there and kick them out on the streets if they don’t pay!

Otherwise the gift with reservation of benefit rules apply which means that regardless of who now owns the house, it stays in Your parents’ estates.

Even if they sell the house to You, apart from SDLT, and probably the extra 3% for having an interest in more than one house, the little known or heard of “Pre-owned Assets Tax” (POAT) will catch Your parents.

POAT is an income tax on a notional rent, not the worst thing in the world if You know what You are getting into.

Debt

You may take the view that the debt You owe Your parents can never be repaid.

But this article is about tax not sentiment.

You will be surprised how much maintenance and care costs can add up to and before You know it the amount could be into 6 figures.

Over 20 years of care and household maintenance, to which was added 13 years of nursing care and then 3 years of double up care added up to over £500,000 for once estate I am advising and again all funded from post-tax earned income.

And then You have a house which even with the additional nil rate band for homes and transferrable nil rate bands, still leaves You with a chunky bill to pay.

40% of a chunky number is still a chunky number.

What can be done?

We are now getting into areas where You really should consult a lawyer.

Keep records of every penny transferred to or spent on behalf of Your parents.

Bank transfers are easy to evidence, as are third party bills.

The aim is to have this expenditure count as part of the second parent’s estate (assuming You have followed the tips above).

In family circumstances, HMRC will not recognise such a liability unless it is evidenced by a deed signed by the deceased.

This is not the law but an HMRC requirement and if You are able to comply with it, then it makes life simpler later on.

Ideally the deed should be updated with each year’s expenditure.

And whilst a law has been passed abolishing the rule that a payment to a parent is presumed to be a loan and a payment to a child presumed to be a gift, it is still, controversially, not in force.

It does amaze me how many lawyers who do wills etc never ask about debts the client might owe on death and to whom, nor the number of law firms who have no precedent for this, I had a case where three sons, all of them pensioners and whose mother had just died aged 98, wanted to know if there was anything they could do in respect of their father aged 99 and living in a very valuable house in a very nice part of London.

Upon questioning them, they reckoned that they had lent their father £1m.

I said we need to get the bank statements to evidence payments, You cannot just pick a number.

This exercise entailed writing to banks for accounts which were closed and a lot of paperwork, but in the end the answer was not £1m.

It was £2m, worth £800,000 of IHT; a substantial return on their investment in my fees.

And when they shuffle, with their Zimmer frame, off this mortal coil?

We are hoping that there is a valid will, or that those left behind could agree a deed of variation.

It probably leaves everything to You, their children.

Now the first rule of giving assets away to save IHT is, don’t give away anything You might need for Your old age.

The second rule is never ever tax plan on Your home; You need a place to sleep and You want to sleep well at night.

The senior partner at the time told me this 34 years ago and I have seen nothing which suggests it is bad advice and plenty to indicate it is good advice (double loan schemes etc.).

The only scheme I have felt any confidence in is where there is a sale and leaseback to a fund and the home owner has a share in a collective fund made up of a number of different houses meaning that the person had swapped a house for a share of a fund invested in a number of houses and therefore had changed her economic position.

So going back to the first rule, You have just received some assets that yesterday You did not need and the truth is probably that You don’t need them now.

So now is the ideal time to vary the will and let the assets skip a generation or maybe even two.

Remember the view of the government is that a single person should only leave £325,000 to his or her heirs without suffering a penal 40% tax, and a couple £650,000.

Whilst that is more than enough for very many people in the UK, if You have read this far, I guess You are not one of them.

Remember if You plan as a family, You can achieve a lot together.

Relief

Not that we are getting to the end but that for IHT there are valuable reliefs for businesses.

A review of where Your assets are owned should maximise this, and not just in respect of UK assets, but worldwide assets too.

Pensions

You may be lucky enough to have a sizeable pension.

I had a client in the public sector whose pension was hit by the capping rules etc.

He asked why there was no one complaining about this in the press?

My answer?

Compared to 99% of the population You are a fat cat, with Your nose in the trough.

No one will have any sympathy for someone with a £2m pension pot.

Feel free to email me or contact me on LinkedIn to correct me if You think I am wrong on that point.

At present the maximum amount of pension contributions per tax year a person can deduct form their income is £40,000.

If you are self employed, then you can always make your spouse work for their living and they can have a pension too, capped at £40,000.

But beware of the lifetime allowance (currently £1.03m) because if you breach that then tax could become due at penal rates.

For more information see https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance.

One thing which is in my view underused is starting a pension for your children.

You pay in £3,600 pa from which you deduct basic rate tax at 20%, so the net you pay is £2,880 pa.

OK, Your children won’t thank You now but they will once they start approaching retirement age.

Hopefully You will be around to receive the thanks.

Confused?

I am not surprised.

Life is not easy and it transpires death is not a picnic either.

No one wants anyone to die, but as Benjamin Franklin / Mark Twain / Oliver Wendell Holmes allegedly said, “nothing can be said to be certain, except death and taxes”, and I hope this article proves the point, but less so in respect of tax if You plan ahead.



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