81-year-old invests for inheritance tax and care fees

81-YEAR-OLD READER'S PORTFOLIO

Note: Price and value as at 1 November, via www.investorschronicle.co.uk

Chris Dillow, the Investors Chronicle's economist says:

I must confess, I don't see what you have to worry about here.

You say you want an income of £6,000 to £8,000. But this is less than 2 per cent of this portfolio. You should easily be able to get this, or more, either from direct dividend income or from selling some stocks and, in effect, creating your own income from capital gains. That's easy enough.

Of course, the prospect of big care home fees is a worry - not least because such liabilities are unknowable. But an average year should see the equity portion of your portfolio make more than £20,000 in dividends and appreciation. This, along with your cash holdings, gets you up to your expected liability.

You say that another liability you face is inheritance tax. But are you really sure your farm doesn't qualify for Agricultural Relief? Even if it doesn't, this portfolio is still sufficient to meet a £100,000 liability, even after care home fees. I'll grant that a big stock market fall plus a big IHT bill for the farm plus big care home expenses might add up to trouble. But that's very much a worst-case scenario of some uncorrelated risks materialising together. You'd be very unlucky if this happens. You could partly insure against it by selling some stocks and shifting into cash, but this has a cost in terms of forgoing probable capital gains.

There's something else you say that puzzles me - that you're hopeful Richland Resources will come good.

It doesn't much matter. It is a tiny fraction of your portfolio. Even if it were to double in price, the gain would be only swamped by normal day-to-day moves in the rest of your equity portfolio

I fear you're making a common error of stock-pickers here - that of ego-involvement. Falls in share prices hurt some stock-pickers not just by costing them money but by making them doubt their stock-picking ability. Try to avoid this by recognising that a few big failures are inevitable: Adam Smith famously said that there is a great deal of ruin in a nation, but there's also a great deal of ruin in any equity portfolio. In stock picking, the pass mark is only 50 per cent. As long as losses don't hurt your overall portfolio much - and this one hasn't - don't worry about them.

In fact, "don't worry" is my main message here. I mean this in two ways.

First, it's entirely conventional for us to run down our wealth in old age: economists call this the lifecycle consumption hypothesis. Sure, it would be nice if this running down took the form of high living rather than care home fees. But it's entirely normal to see one's wealth decline at your time of life.

In this context, I'm always a little perplexed by people who want to leave bequests to their children. If you've given them a decent start in life, you’ve done all they can reasonably expect. There's no point making life hard for yourself now in an effort to give them more. Remember whose money it is. (I write as a son but not a father: I don't know whether this strengthens or weakens my point.)

Secondly, let's have some context here. This is a largish portfolio; the median couple aged over 80 has less than £30,000 of net financial wealth. And it is a very well-diversified one; some people might think it a little equity-heavy for an older person, but this is very debatable. This suggests two possibilities: either almost everyone in your age group has money trouble; or you're worrying too much. I'd favour the latter.

Colin Low, chartered financial planner at Kingsfleet Wealth, says:

You have obviously benefited from many years of patient investing and your investment arrangements strike me as being highly diversified, well researched and tax efficient in nature.

You raise some key issues that are apparent in an increasing number of cases. Where individuals have been prudent and saved a proportion of their income over time, they now face up to the very real risk of having their assets eroded by the twin blights of care costs and inheritance tax (IHT).

Many strategies for dealing with IHT and care fees planning overlap, especially when working on a plan for a married couple and I am sure that it would be wise to invest in obtaining professional advice in this regard. So this response is quite general in nature but do remember, that every £100 that you make now will lose £40 unless your IHT position is resolved.

The first thing to consider when calculating IHT liabilities is to understand what is chargeable to tax. You refer to the ownership of a farm, and it is worth understanding if it is exempt from any IHT liability through Agricultural Relief, and this is not a position which is always clear.

The next consideration is whether annual gifts and exemptions are being used in full. Although the annual £3,000 gift exemption may not seem like a significant help, between a husband and wife, it can be doubled, and it is often used as a means of funding a life assurance policy, in trust, to meet the liability on the death of the second to die. In fact, do just ensure that your existing life policy is in trust otherwise it will simply add to your IHT issues. Also, the facility to make regular gifts out of surplus income may be beneficial to some people.

A further partial solution to your inheritance tax matter is the possibility of using Business Property Relief (BPR) investment arrangements as a means of taking these fund values out of your estate after two years, rather than the usual seven years that apply. A number of different alternatives are available in this regard, and these diverse strategies accommodate varying levels of investment risk.

One other strategy that could be helpful in terms of the provision of income, inheritance tax planning and dividing up your estate is a very interesting solution called a Discounted Gift Scheme. Space does not permit a full explanation regarding the workings of such arrangements, but they allow a broad range of investment assets that can be tailored to the appropriate risk profile as the client requires. These require very specialist advice, but there could be significant value in such an enquiry.

In order to make up your income shortfall, there is more than one way to 'skin a cat'. It could be of benefit to utilise your annual Capital Gains Tax exemption as the way to make up your 'income' shortfall. Each individual can benefit from up to £10,900 in gains in each tax year before any tax liability arises and this could be a useful way of filling your income requirement, notwithstanding the facility to extract tax free gains from your Isa arrangements.

MORE READING:

How to avoid IHT using AIM

Inheritance tax: the bigger picture

How to pay less inheritance tax