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Avoiding Inheritance Tax

Below are four straight forward examples that could help your children avoid inheritance tax also known as death duties. With inheritance tax being charged at 40% for estates over the nil rate band (currently £325k) it is not surprising people take careful tax planning steps to avoid this unfair tax. Many of our clients simply say "We have paid taxes all of our life, why should we pay them again!"

Immediate Post Interest Trusts

Lets assume Mr Smith's estate is over £1million when he dies. If his residuary estate passes to an Immediate Post Death Interest (IPDI) for the benefit of the spouse there would have been no Inheritance Tax (Death Duties - IHT) to pay on first death due to the spouse exemption rules.

Over the next few years the Trustees could use their advance powers to pay monies from the Immediate Post Death Interest Trust (IPDI) to Pilot Trusts which could have been set up at the time Mr Smith made his Will with IWC. Assuming Mrs Smith lives more than seven years these gifts would not be recalled as Potentially Exempt Transfers (PET'S). The Immediate Post Death Interest Trust (IPDI) could now be empty. Mrs Smith's estate is just her half of her house which is under the nil rate band. The Pilot Trusts now hold the estate for Mr & Mrs Smiths children free of Inheritance tax, free of Capital Gains Tax and free of 10 yearly tax charges and exit charges as the trusts hold under the nil rate band. Important note: This is generic information not individual tax advice, if you would like us to help you reduce your inheritance tax bill why not call one of specialists advisors on 0845 600 3527 to see if we can help you.

For those people who have wealthy children inheritance tax can also be avoided using alternative methods such as a "Sell and Rent back" scheme. For example your children could buy your property from you at the full market value. You would then pay your children a commercial rent for living in what would now become their property. You could calculate your own life expectancy and pay them a lifetime of rent using the money they paid you. This money, that the children receive from you, would of course be subject to Capital Gains Tax (CGT) which would need to be handled correctly by our accountants.

You would then use your own inheritance tax allowances and other various methods to reduce the size of your own capital and thus avoid the inheritance tax on your now cash assets. The CGT bill paid by your children for the lifetime of rent would be far less than the Inheritance Tax (IHT) bill they could receive from a £1million house. Important note: This is generic information not individual tax advice, if you would like us to help you reduce your inheritance tax bill why not call one of specialists advisors on 0845 600 3527 to see if we can help you.

Sell to Spouse

Lets assume Mr & Mrs Smith own a house worth £1million, if they both pass away their estimated inheritance tax bill on the house alone currently stands at £140,000.

Mr Smith buys Mrs Smith's half of her house in exchange for an IOU Promissary note to pay her £500,000. There is no Capital Gains Tax between spouses. Of course there will be Stamp Duty Land Tax for this transaction (approx £20,000).

The IOU note is then gifted to their children with a life interst for Mrs Smith. This gift is Captial Gains Tax free as it is not actually worth anything. If the children subsequently divcorce their own spouse this gift can not be classified as part of their assets. Mr Smith's will states that his estate passes to Mrs Smith, his estate is now £1million but is reduced by the IOU that he owes the children. The rest passes to his spouse and he has not utilised any of this nil rate band. When Mrs Smith passes away her estate passes down to the children and she now has two nil rate bands to utilise but she only owns half of the house. This scheme potentially could save £100,000.Important note: This is generic information not individual tax advice, if you would like us to help you reduce your inheritance tax bill why not call one of specialists advisors on 0845 600 3527 to see if we can help you

This next example only works well if your children live with you. Otherwise the capital gains tax implications may exceed the inheritance tax reduction advantages.

The solution is to gift one half of the property to your children. The important part with this particular inheritance tax solution is to ensure your chidlren go onto all utility bills, otherwise when you pass away the Inland Revenue will argue that you created a gift with reservation. Important note: This is generic information not individual tax advice, if you would like us to help you reduce your inheritance tax bill why not call one of specialists advisors on 0845 600 3527 to see if we can help you