The great share portfolio in the sky

17th Jun by tiswas

19 comments 831 reads

Ok, not the cheeriest of subjects but I would appreciate people's thoughts all the same.

The premature death of a friend has made me think a little more about estate planning. When my father passed away he had a few unit trusts, a few privatisation legacy holdings and a work pension, God bless him.

Like most people on here I have a very active stock portfolio, mostly in tax shelter SIPPs or ISAs that I trade regularly. Maybe 30-40 stock holdings or more, trading at least weekly.

So, let's say England win the Euros and the shock causes me to have a heart attack . What should my instructions in my will be?

The wife has no clue or interest in managing a portfolio but will need to sell stocks from time to time to supplement salary/pension. So do I leave instructions that the portfolio is liquidated or do I have it run on for dividends and capital growth? Who do I ask to make the decision as to when a share should be sold on news/price movement/macro factors.

As I currently do this as a full time job do I trust a wealth manager to manage it as I would have done, very unlikely, or not to charge an arm and a leg for a poor service and trash the portfolio.

And on top of this I need to make sure records are clear for any qualifying AIM stocks that will help mitigate IHT, very difficult for a trader who might just have a small holding of long term stocks that meet the 2 years plus requirement. Also everything is online now so spreadsheets and passwords are necessities as no share certificates laying around!

I guess it is the no longer being in control that I have not really given enough consideration to, but I am not sure of the alternatives.

So, thoughts from young and old would be appreciated as none of us know what is just around the corner!

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SCI20

17th Jun

Very thought provoking tiswas. These are questions I have asked myself but have not a definitive or satisfactory answer to.

The Phoenix

First of all make sure you have filled out an expression of wish and this is filed on your Sipp providers records.

If you have enough in the Sipps to fund needs for rest of yours and your wife's lives consider selling it all down to cash and split over 5-7 money market funds , Royal London short term money market currently yielding 5.18%.

The only other options I can see is your wife takes on an ifa to run it all or if you have a trusted friend who has knowledge on a par or better than yours maybe they would be willing to step in.

BnB

The portfolio is an expression of your trading style. Once you are no longer around, it should reflect your heirs’ attitude to money management, not yours. If they don’t have your interest in the matter, then they will be very much better off with a reputable wealth manager. If you have amassed a decent sum, then your heirs might qualify to go with a proper institution like a Swiss bank, which I greatly favour over UK equivalents. But the dividing up of your estate could mitigate against that option. It’s painful to contemplate but it’s almost certain some of your hard work will be wasted away. But there’s no pockets in shrouds, so try to stay relaxed about it!

john2

Warren Buffett has said that after his death his assets should be invested in a low-cost S&P 500 tracker.

Logical David

Hi tiswas,

Below is my understanding of how things work when you 'fall off you perch' but please bear in mind that I might be wrong and I'm sure people will correct me if I am. On the day you die the value of the shares you hold in your ISA will be valued at whatever is the price at the close of trading on the stock market. Your solicitor can obtain the share prices for the shares you hold.

Shares in an ISA cannot be transferred to another person when you die. Instead the shares have to be sold once your wife has probate. Like you say, some AIM shares over 2 years old are exempt from IHT.

Depending on the gain/loss from the sale of your ISA shares for the period from when you die until they are sold at probate will decide how much IHT is paid should your estate be greater than £325,000 . But like I say, this is just my understanding.

David.

timarr

Complex ...

SIPPs can be inherited and are outside of IHT

If you're under 75 when you die then money can be extracted from your SIPP tax free. If you're over 75 then the beneficary's standard tax rate applies to withdrawals. This is all a bit up in the air because of the changes to the lifetime limit, try not to die until the next government sorts this out. As noted below you should make sure your SIPP provider has your nominated beneficiaries set up as this will make things easier. SIPPs are outside of IHT.

ISAs can be inherited (but only by your spouse)

ISAs are within IHT limits so if you're likely to exceed the IHT limit for spouses (currently £650,000) then you need to think about talking to an advisor. This gets more complex if there are other beneficiaries. Your ISA dies with you - but your spouse can inherit your ISA funds, they can be transferred into her ISA without impacting the ISA tax free status. This is painful, I've just done it for my mother, but keeps the tax benefit so it's very much worth doing.

Keep It Simple, Stupid

If your spouse has no interest in stockmarkets then it's pointless leaving her a complex set of instructions about what to do with a complex portfolio. Any instructions need to be clear - e.g. "sell all stocks as soon as possible, buy the following ETFs ... only take the following percentage of funds from the portfolio in any given year, take the money on the following dates". KISS.

AIM BPR is (probably) not worth worrying about

If everything is going to your spouse and everything (more or less) is inside tax shelters then AIM shares qualifying for BPR are largely an irrelevance. Don't burden her with the problem.

Run down ISAs first, inherited SIPPs can be inherited

In retirement, if IHT is a concern, we should take money preferentially from ISAs first. When your spouse dies any funds in your SIPP can be further passed on to a beneficiary she nominates.

Keep your will simple

The SIPP inheritance rules rely on informing HMRC quite quickly, so whatever you do don't make your will complex. In particular avoid charitable donations as charities are obligated to maximise their income and this can delay things if there's any uncertainty. If you have a favourite charity make the donation while you're alive, it'll make you feel better and give them the money sooner.

But preferably ...

Don't die (yet) and spend it while you can enjoy it!

ken mitchell

It’s so good that you’ve asked about this tiswas and that you’ve already had replies including a superb one from timarr that I really appreciated. It’s something most of us need to think about, and as you’ve pointed out regardless of our age. So I hope a lot more see this thread and post advice.

I had to face this issue a couple of years ago because of serious health issues including frequent sepsis episodes, hopefully solved by a recent bowel operation. My wife has little interest in our portfolios and I realised that I had to change our portfolios so that they can hopefully look after themselves and ride out the big stock market dips too. So the health issues did us a favour as it woke both of us up to the need to consider issues we all prefer not to!

I’m not saying the way I’ve done it is the right way and readers might see glaring faults I’ve failed to see. My portfolio and my wife’s are in ISAs.

So what did I do?

1. Raised significantly more cash by selling shares I liked but not suitable for a portfolio to run itself. That cash has gone in to our existing savings accounts in joint names. So there is plenty of cash in no risk accounts. That’s very reassuring to a spouse left an ISA investment portfolio he/she doesn’t understand.

2. Turned the focus of our portfolios in to quality big dividend paying shares and Investment Trusts. Doing that means substantial annual dividend income which I’ve explained can be taken out of the ISA from time to time. My ISA as timarr has explained gets transferred to me and mine to her. I’ve explained that she doesn’t need to do any buying or selling as hopefully the many quality winners will way outnumber the inevitable losers. If she needs to sell I’ve just said sell the biggest losers and not big winners paying very big dividends as a result of that share price gain.

3. Reluctant though I was to do it, I’ve ditched most of the non dividend paying shares I liked with big capital gain potential. That money has gone mainly in to big dividend paying Investment Trusts on big and often undeserved discounts to NAV. Discounts on Investment Trusts are the widest they’ve been for ages.

There’s a good Investment Trust thread on Stockopedia and it’s updated every month by Charles Mitchell. Here’s the link to the latest June Investment Trust thread:-

https://www.stockopedia.com/co...

There have rarely been so many quality shares and Investment Trusts paying such exceptionally big dividends, and with a lot of them increasing the annual dividend too. So it’s not too late for this tactic if it appeals.

I’m willing to list shares and Trusts in our current ISA’s another time with focus on the current dividend yields at the buy prices if there’s any follow up to this post. (Threads away from the small company one often see very few viewings and posts). Otherwise please post negatives to my approach.

Lincs

David, your understanding is not quite correct when spouse or civil partner inherits one's ISA, for those situations the stocks can be transferred 'in specie' (see below) and there is not an obligation to sell prior to transfer. If one requires this to be possible it's important to note the requirement of both partners to have the same ISA provider - a situation my wife and myself have intentionally maintained. This from Gov site

Stocks and shares ISAs

Your ISA provider can be instructed to either:

sell the investments and pay the proceeds to the administrator or beneficiary of your estate
transfer the investments to your surviving spouse’s or civil partner’s ISA - this is only possible if they have the same ISA provider as you

rpannell

18th Jun

This discussion is very timely for me, having just completed my mother's estate and subsequently written a long term plan for my own investments.

One of the IHT benefits not mentioned so far is that CGT evaporates on death, so this is a major benefit for money held outside an ISA or pension.

At my wife and my current age of 67, one of us has a 50:50 chance of surviving until 89 or 22 more years. We have a 50:50 chance of both surviving until 79. Currently, CGT evaporates on death. Using long term past inflation rates and world stock index growth rates, in 22 years, a buy and hold index linked portfolio that is never sold will be about 6 times the current value. So 6/7th or 86% will be capital gains. Current CGT is 20% and IHT is 40%. So the effective tax rate on 2nd death is 40% - 6/7 * 20% = 23%.

If CGT increases to 40% (likely to happen with the next labour government) then CGT and IHT almost cancel each other out. This assumes that CGT continues to evaporate on death.

The above means that a ‘never sell’ investment process may be the best process to maximise the amount able to be passed down to the next generation. A ‘never sell’ portfolio will need to be in a collective investment, such as a trust or ETF, such that the constituents of the trust can change but without any personal CGT to pay.

ezlifeme

Great detailed tax opinion on estate planning rpannell and as you suggest it may soon change. The trouble as always with tax planning is you plan based on the current tax environment and then unexpectedly windows or beards get taxed, and your planning goes to pot

https://kaplan.co.uk/blog/feat...

Indeed. It is one of the reasons I dislike trusts. Trusts are expensive to setup, then a future government can totally change the goal-posts.

Hi Lincs, You are correct in what you say regards the transfer of ISAs between spouses. However, for somebody like rpannell whose mother died, the rules are different and as he has learned ISAs are not transferable between other family members.

The answer is complex ref death and ISAs, IHT & CGT and trying to explain things in a just a few lines of text is challenging but hopefully other Stocko members will add their own life experiences to tiswas' article.

Hi out of interest what internet site are you using for the life expectancy stats your quote ?

Regards

Andy

I cannot find the one that I originally used but this one gives very similar results - https://www.pgcalc.com/pdf/two... This table gives 25 year expectancy of one person surviving, if both are currently 67.

Indie

On a side note... I would encourage people to also think about the time that they may be alive but not able to look after their affairs by having Powers of Attorney in place (for both body and money).

ayresomeangel

20th Jun

Martin Lewis has just released a podcast regarding the rules, pitfalls etc associated with IHT, thresholds, probate, HMRC deadlines, interest on unpaid tax…

He puts questions to 3 “experts” - well worth a listen. Link below

Listen to 'Inheritance tax June 2024' for free via
BBC Sounds | Apple | Spotify

22nd Jun

Thanks

pka

24th Jun

Hi rpannell, you wrote:

"At my wife and my current age of 67, one of us has a 50:50 chance of surviving until 89 or 22 more years. We have a 50:50 chance of both surviving until 79. Currently, CGT evaporates on death. Using long term past inflation rates and world stock index growth rates, in 22 years, a buy and hold index linked portfolio that is never sold will be about 6 times the current value. So 6/7th or 86% will be capital gains. Current CGT is 20% and IHT is 40%. So the effective tax rate on 2nd death is 40% - 6/7 * 20% = 23%."

I don't think this is correct, unless I have misunderstood what you meant. There is no CGT payable at the time of either the first or the second death. But if the assets other than a share portfolio in an estate are worth more than the IHT Threshold at the time of the second death, then I think the whole of the share portfolio would, in effect, be subject to IHT at a rate of 40%, not 23%.

Sun 5:39pm

Hi pka, yes there is a misunderstanding of what I was trying to say. I agree that there is no CGT payable on death (first or 2nd) and that the uplifted value of the asset (including any capital gain) is used for the IHT calculation. What I was trying to say is that based on past gains, after 22 years of an untouched index linked ETF or investment trust, most of its value is the capital gain - around 6/7th of its value based on the average gain for the past 97 years. So 6/7th of the value (after 22 years) is exempt from CGT but all is subject to IHT. Currently the CGT tax rate is 20% but if it becomes 40% or 45%, this is a considerable CGT saving on death and the saving in CGT is about the same as the loss due to IHT. I hope this explains it better.

The great share portfolio in the sky

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Tiswas

19 comments

Stocks and shares ISAs

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About the Author

Tiswas

19 comments

Stocks and shares ISAs

Listen to 'Inheritance tax June 2024' for free via BBC Sounds | Apple | Spotify

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