Mused by Mark Green of Green Gem Financial Ltd, County Durham.
Consider a wealthy widower pensioner wishing to buy a
yacht for £600,000:
He could draw 1.2 million pounds from his pension under flexible drawdown and
pay £600k tax or he could borrow the money and let his estate pay it off later.
Scenario 1:
He takes the £1.2M from his pension, pays £600k tax and buys his yacht.
If he were to die straight away he would pay a further 40% IHT on the Yacht of
£240k leaving his dependents with a mere £360k or 30% of the original
£1.2M drawdown.
If he dies 10 years later and his yacht was worth £300k he would pay £120k
extra IHT leaving his dependents with £180k or 15% of the £1.2M
drawdown.
Scenario 2:
He takes out a £600k mortgage, leaves his pension intact and buys his yacht.
If he dies straight away the yacht pays off the mortgage and he has no extra
IHT to pay.
His £1.2M in his pension fund pays 55% tax leaving his dependents with £540k
or 45% of the £1.2M pension fund.
This is £180,000 more, equal to an extra
15% of the £1.2M pension pot.
If he dies 10 years later and his yacht is worth £300k, he would have £300K
less in his estate as the mortgage debt is twice the value of his yacht. Hence
the estate pays £120k on the yacht and saves £240k on the IHT on the house.
Saving £120k.
His £1.2M in his pension fund pays 55% tax leaving his dependents with £540k or
45% of the £1.2M pension fund.
The estate also saves £120k on IHT and has a £300k yacht to sell.
This leaves the estate with £540k + £120k + £300k less £600k mortgage = £360K
This is also £180,000 more, equal to an extra
15% of the £1.2M pension pot.
The mortgage payments should be more than met with the expected tax-free growth in the pension fund.
Hence: Welcome to the new Flexible Yacht Fund.
mark@greengem.co.uk www.greengem.co.uk