PER­SONAL AC­COUNT

The Daily Telegraph - Your Money - - YOUR MONEY - Richard Dyson

Life­long fixed mort­gage rates of less than 4pc of­fer a way to beat death du­ties

For most re­tired house­holds, the plunge in in­ter­est rates since the fi­nan­cial cri­sis – in­clud­ing last month’s ar­guably mis­taken cut by the Bank of Eng­land – has been disas­trous.

Re­turns on cash ac­counts have fallen by an av­er­age of 75pc just since 2012. So here’s a nice sur­prise. The one area where older, wealth­ier house­holds can ben­e­fit from fall­ing rates is in the field of life­long mort­gages. They are cheap enough now to have be­come a po­ten­tially ef­fec­tive way to avoid death du­ties.

Big providers are slash­ing rates by the week, down now to as lit­tle as 3.78pc fixed for life. And you can re­pay some of the debt as you go, mean­ing you’re able to limit the over­all cost to your es­tate of the loan.

In essence you’re weigh­ing up the cer­tainty of in­her­i­tance tax on the one hand against the cost of bor­row­ing on the other.

Say you’re aged 78, have a prop­erty worth £1m, am­ple pen­sion in­come but mod­est ad­di­tional sav­ings.

You bor­row £250,000 now against your home and give it to your chil­dren. Un­der in­her­i­tance tax rules, you need to sur­vive seven years for this to fall out­side your es­tate and thus es­cape the 40pc in­her­i­tance tax that ap­plies to ev­ery­thing above your in­di­vid­ual £325,000 al­lowance (£650,000 for mar­ried cou­ples). There is also, to come in future years, an ex­tra fam­ily home al­lowance – but let’s dis­count that for now.

The £250,000 you raise to give to your chil­dren would oth­er­wise have trig­gered a £100,000 tax bill. So that’s what you’ve got to beat.

At 3.78pc (tak­ing the cur­rent best rate from Le­gal & Gen­eral), in­ter­est on £250,000 comes to about £9,500 a year.

You re­pay the max­i­mum al­low­able 10pc of the orig­i­nal loan back each year (£25,000) out of sur­plus pen­sion in­come, or your chil­dren them­selves con­trib­ute from their in­comes.

Say you die in seven years aged 85. Num­ber-crunch­ing by Key Re­tire­ment, a lead­ing ad­viser in this field, puts the to­tal in­ter­est cost (so ex­clud­ing your cap­i­tal re­pay­ments) at £52,999. You have safely avoided the tax li­a­bil­ity and have made a con­sid­er­able sav­ing.

Say you die in 10 years, aged 88. Now the in­ter­est on the loan amounts to £65,199. Again, a worth­while sav­ing. If you die in 15 years aged 93, the in­ter­est comes to £78,489.

In this sce­nario you would need to live to age 100 – that’s 22 years after tak­ing out the loan – for the to­tal in­ter­est cost to nar­rowly ex­ceed the death duty bill of £100,000 that would oth­er­wise have been due.

Even if you did live to 100, mean­ing in­ter­est costs on the debt would to­tal £101,766, do not for­get that your chil­dren would have had the ben­e­fit of £250,000 for more than two decades.

Of course, as I’ve writ­ten be­fore, this is­sue isn’t only about avoid­ing tax. It’s also about the po­ten­tial value to younger mem­bers of your fam­ily

On a re­lated sub­ject, there was a time when I could ring up any ac­coun­tant in the coun­try and ask for ex­pert as­sis­tance when writ­ing a piece such as this, aimed at help­ing peo­ple pay less tax. Not any more. Lawyers and ac­coun­tants don’t want to be pub­licly as­so­ci­ated with any­thing that ap­pears to en­cour­age the prac­tice of pay­ing no more tax than the law re­quires.

A tone of right­eous hys­te­ria has crept into dis­cus­sions of tax avoid­ance. In­stead of at­tack­ing leg­is­la­tion – ei­ther for be­ing poorly con­structed or for tax­ing in­suf­fi­ciently – a moral­is­ing group (not only on the Left) is now round­ing with McCarthy­ist fer­vour on those who wish not to pay need­less tax.

This drift into re­gard­ing le­git­i­mate tax avoid­ance as im­moral or a fail­ure of pa­tri­otic duty is dan­ger­ous, be­cause it clouds the real prob­lems in our tax sys­tem: over-com­plex, vague and bodged leg­is­la­tion. Tax­pay­ers shouldn’t have to cough up vol­un­tar­ily for de­fi­cien­cies in law. The fa­mous judg­ment by Thomas Tom­lin in the Thir­ties, while cliched, is true: “Ev­ery man is en­ti­tled if he can to or­der his af­fairs so that tax … un­der the ap­pro­pri­ate Acts is less than it oth­er­wise would be.”

Lord Thomas Tom­lin, the High Court judge who fa­mously ruled that tax­pay­ers could le­git­i­mately ‘or­der their af­fairs’ to re­duce their tax bills

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