Solving your Inheritance Tax liability, and your kids Inheritance Tax liability

General

Say a married couple in their 70?s have total assets of ?850k less the double Nil Rate Band for IHT allowance of ?650k leaving therefore ?200k liable to IHT, the 40% charge would therefore be ?80k at time of second death.

Imagine they have 2 adult children. Solving the parents IHT problem is relatively easy.

Firstly option, they could simply give away (or PET, Potentially Exempt Transfer) a ?100k to each child in the hope that they survive the 7 year qualifying period.

Second option, they could PET the ?100k to each of the children but more securely in a ?Solicitor controlled trust? and again hope that they survive the 7 year period.

Thirdly they could invest the ?200k excess into a BPR, Business Property Relief scheme such as Octopus and get the IHT exemption after just 2 years.

The additional problem they haven?t considered yet, is that when the children actually inherit ?425k each from the parents and add this to their own estate (and to any estate which they inherit from the other side of the family) it is very likely that we will have created an IHT liability for their children which was not there to begin with.

Accordingly then, the parents should set up two FPT?s, Family Protection Trust for all the usual reasons (some we talk about and others we don?t) and put the full allowance of ?650k into their two Trusts.? They should then invest the ?200k excess into a BPR scheme and, after the 2 year qualifying period, add the BPR investments to their FPTs.? Since the excess is by that time IHT exempt, it is not a Chargeable Lifetime Transfer and does not therefore exceed their lifetime allowance.? By doing so the Trustees then have the option when the parents die of distributing to the children, retaining within the FPTs for the benefit of the children or lending the trust funds to the children in exchange for a validly constituted IOU.

By retaining the funds in the parents FPTs or using the IOU Scheme approach, we will not only have avoided ?80k of IHT on the parents? death but avoided creating an IHT liability for the children.

If you would like to know more about how you can plan to avoid paying IHT, please get in touch, we have a range of IHT planning options, one is bound to suit you. Contact Us here.

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