As professional financial advisers we are dedicated to building our clients a secure future. And part of that commitment means trying to keep more of our clients’ money in their hands and less of it in the tax man’s hands. This is a core principle of financial planning – but never more so than in later life. First, though, we need to get the message across that action needs to be taken before an event happens that focuses the mind on the need to do something. Because by then it’s usually too late.
Money down the drain - paying tax or paying for elderly care
Let me explain. There are two main money drains in later life. One is the cost of funding care, should it be needed. The other is Inheritance Tax. Each can have a devastating effect on what you have left to pass on to your family. Worst case scenario – and this is becoming increasingly common – is that there is nothing left at all. And it’s no good burying your head in the sand thinking you’ll cross that bridge when you come to it. Because when you get to that particular bridge – there’s very little you can do.
You may think – and I have genuinely had several people say this to me, believe it or not – that if you have money then you are obliged to pay your fair share of tax. I don’t have a problem with that – it’s defining what “fair share” means. There is a basic legal principle – established by the American Judge Learned Hand many years ago that “"anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."
The law says you can arrange your affairs to your best advantage
My take on this is very simple – if there was a way of protecting your money so your family get to keep more of it – why wouldn’t you do it? I’d maybe be more inclined to pay more than my fair share of taxes if I felt that such taxes were being used wisely. And if you think the Government is going to spend your money wisely – well, all I can say is Good Luck with the Fairies!
It doesn’t take long for your hard earned cash to disappear
One of the worst things we have to deal with is the dreaded call “my mother/father is going to have to go into care – what can I do?” The answer, at that stage, is usually pretty much nothing. With care costing anywhere between £500 and £1,000 a week it doesn’t take long to disappear. And even earlier planning is usually needed to deal with Inheritance Tax – payable at 40% on death when you are worth over £325,000. Let’s make this plain – if you are worth £500,000 (it sounds a lot but doesn’t take much with a reasonably sized house and a few investments), then your Inheritance Tax bill will be £70,000. If you are worth £700,000, tax payable will be £150,000.
Fortunately, there are fairly straightforward ways of putting things in order to protect against these eventualities – many involving relatively minor adjustments to the way your assets are held. The right solutions depend on many factors but the range of solutions generally diminishes as you get older.
An initial meeting – at our expense – will establish whether you have a problem, and if so, what you can do about it. Make sure your money goes to your family and now down the drain.
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Guest Post: Julie is the director of Pen-Life, financial planning practice which provides independent, no-nonsense financial advice from Yorkshire. We advise private, corporate and trustee clients throughout the country on insurance, investments, pensions, long term care and inheritance tax. You can also find her on Google+ and Twitter.