Inheritance Tax was introduced as a tax only for the rich, but more estates are being caught within the tax net. A recent study shows that UK Inheritance tax is the second highest in the world with over £3 billion in inheritance tax being paid to HMRC this year. This has resulted in an increasing number of families planning to mitigate their inheritance tax bill.
This article is intended to stimulate thought so that readers might take specialist advice, and does not provide advice on individual circumstances.
A is living comfortably and his parents have a combined estate of £350,000. As such they will not have to pay inheritance tax on their death, being well below the exemption of £325,000 each, so no estate planning has been undertaken.
By taking modest growth and a 20 year generation life expectancy, the £350,000 could be expected to grow to £700,000 by A's death, increasing his inheritance tax by £280,000 (40% of £700,000). This can be avoided by re-writing his parents' Wills.
Tax Tip: Plan your parents' Wills
B receives a substantial inheritance of £1.25m net of inheritance tax as the sole beneficiary of a Will. He and his family live comfortably but not excessively, and he will invest most of the inheritance and spend the income.
By amending the Will by a Deed of Variation, the inheritance can fall outside Bs estate for his children and potentially be outside the children's estates as well. If we assume modest growth in the investments and a 20 year life expectancy for B, the tax saving for his children could be £1m!
Tax Tip: Think long term and only "own" what you need to own. Owning and controlling can have very different tax consequences.
C is well off and does not need the inheritance from his parents and by-passes his estate by waiving it in favour of his children, who will reduce their mortgages. By using a trust, C can still reduce his children's mortgages but can remain a potential beneficiary of the trust fund.
He wants to place funds on one side for possible nursing home fees and accepts these will fall to be taxed at 40% inheritance tax if unused.
He can make gifts of the funds, put on one side for nursing home fees, to his children from which they can repay the trust loan, and the trust fund can be seen by C as a safety net for nursing home fees.
Tax Tip: Use trusts to the full extent permitted. Beware; the treasury is seeking to reduce the tax advantages of trusts.
D's grandchildren have graduated and now seek to set up home but need a deposit. D will lend £25,000 to each, but is concerned about what might happen to the deposit if the relationships with the grandchildren's partners do not survive.
A trust can often make interest-free loans to potential beneficiaries, taking a second charge behind the main mortgage lender. If mortgages are to be protected by life assurance, take out two equal life policies for each mortgage.
Tax Tip: Some things you can't predict, so plan accordingly.
RWB Chartered Accountants provide family tax-planning advice and offer a "no quibble" money-back guarantee if the planning process fails to identify worthwhile opportunities.
The views provided in this article are for general information purposes only. Nothing in this article represents advice of any nature whatsoever. Accordingly, RWB CA Limited does not accept any liability or responsibility for the information contained in this article or any decision or other action that may be taken in reliance upon the information contained within it. RWB CA Limited accepts no responsibility for any errors of fact or opinion and assumes no obligation to provide you with any changes to its assumptions.