Inheritance Tax (IHT) Case Study

Inheritance Tax (IHT) Case Study

Nobody likes paying taxes, and even on your death, your children or grandchildren could be subject to 40% tax on a substantial part of their inheritance. HMRC received £5.3 billion in IHT receipts in the financial year 2020/2021. IHT can significantly reduce the estate that you leave to your beneficiaries, therefore planning for IHT is something everyone should consider and take professional advice on. There are a number of potential tax-efficient solutions which could be considered to mitigate the possible IHT liability on death.

Case Study

Mrs Erskine is a 68 year old widow who retired two years ago. She is in good health and has three financially independent children. She has made a Will and upon her death the estate will be passed to her children equally. One of her children is married with one child, one is in a long-term relationship and has a child with her partner, and one is divorced. Mrs Erskine would like to ensure that her estate remains within the family bloodline and would like to protect any inheritance to her children should they get divorced.

Mrs Erskine’s estate is worth £2.3 million and consists of her main residence worth £1.1 million and a holiday home worth £160k with the remainder being held in cash deposits, ISAs and an investment portfolio.

Mrs Erskine has no liabilities.  She repaid her mortgage a couple of years ago utilising the Tax-Free Cash Lump Sum from her pension. She has an annual pension income of £39,000 derived from her State Pension and a private pension. Her income is in excess of her expenditure requirements.

Mrs Erskine has inherited 100% of her deceased husband’s estate and his Nil Rate Band (currently £325,000 in 2021/22), which gives her a total of £650,000 including her own Nil Rate Band.

She also has an IHT Residence Nil Rate Band (RNRB) of £175,000 which is in addition to an individual’s own Nil Rate Band of £325,000, and is conditional on the main residence being passed down to direct descendants (e.g. children, grandchildren). Her husband’s RNRB will also be available to her as well in this case.

There are some complex aspects of claiming the residential Nil Rate Band and advice should be sought.

Assuming that Mrs Erskine has not taken any financial planning advice, her estate could be liable to 40% tax on the chargeable portion of her estate of £1,300,000 should she pass away imminently, as shown below:

 Total Estate £2,300,000
 Standard Nil Rate Bands (including 100% inherited from Mr Erskine) £650,000
 Residential Nil Rate Band (Mrs Erskine in 2022) £175,000
 Residential Nil Rate Band (inherited from Mr Erskine) £175,000
Taxable Estate£1,300,000
40% Tax£520,000

Therefore, Mrs Erskine has a significant IHT problem; and it is vitally important that she consider taking appropriate financial planning advice in order to minimise or even completely mitigate her estate’s IHT liability.

Do you realise this Tax is optional.

Mrs Erskine has 2 options;

  1. Do nothing and her Beneficiaries will have to pay IHT of £520,000
  2. Discuss the options with us and reduce or even completely mitigate the IHT liability

Suitable solutions will depend on your personal circumstances, objectives and requirements. Such solutions could be:

  • An investment into an Accelerated IHT Plan which immediately offsets 40% of the invested funds (through life assurance cover) against the IHT liability, no medicals required and available up to age 89.
    •An appropriate Trust arrangement.
    •Appropriate life insurance policy written under Trust.
    •An investment into a scheme which will qualify for tax reliefs, including business property relief.
    •Gifts that will qualify as Potentially Exempt Transfers or Chargeable Lifetime Transfers.

If you would like to discuss your circumstances and address the potential IHT issue, please contact us and our financial advisors will be happy to explore this with you and advise accordingly.

Contact Us HERE for more information if you find this of interest.

 

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