Inheritance tax (IHT) is one of the most hated taxes. A lot of people object to paying a substantial amount (40%) of their wealth to the tax man, when they have spent a lifetime building it up from post-tax income.
There is no better illustration of this, than the fact that lots of people who claim to hate it, will never pay it. Most people don’t have £500,000 each to pass on and this is the limit (in most cases) before the tax is even payable.
Avoiding inheritance tax is only easy in theory, as to do so requires (in some from or other) transferring money away from yourself to someone else. Getting the timing and amount right for both the loss of capital to you and the receipt of capital to your children (or others) is really tricky. Often you might be ready and confident that you no longer need a portion of your money but deeply unsure that the next generation are ready for it.
“Broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.”
Roy Jenkins, Labour Politician – 1986
There is one opportunity in life for most people to have the perfect solution. It avoids inheritance tax, allows you to retain access and anyone else to have access. It is the most flexible inheritance tax planning that there is (and is the most excited we ever see clients get about tax planning).
The only drawback is that you can’t control the timing and amount of this type of planning because it only applies when you inherit money yourself and must be completed within two years of the date of death.
Some solicitors will ask whether you want to complete a Deed of Variation to transfer the amount that you are due to receive to the next generation. This has the advantage of this money never being treated as having been in your estate and so passes direct to the next generation without any impact on your own tax position. Unfortunately this doesn’t go far enough as you might not be ready to give up access to that money and the next generation might not be ready to receive it.
The perfect solution is to complete a Deed of Variation on your inheritance but pass it into a discretionary trust, rather than direct to an individual. This has al the advantages of passing it to someone direct but in addition:
- The money isn’t in the estate of the children or grandchildren for inheritance tax, divorce assessment or bankruptcy.
- You still have full access the money.
- Money can be lent back to yourself or anyone else (keeping it away from divorcing son/daughter in-laws).
- Loans taken by you can be repaid from your estate on death to reduce the taxable estate.
- The money can be invested in any way you like, independently of your own wealth.
The only drawback is that there will be some legal fees to pay but these are not huge and so only preclude the smallest of inheritances. Apart from this there are really no major drawbacks and so anyone with an IHT problem should seriously consider this planning step.
As we have been advising clients for nearly 25 years now, we have many of these trusts running. They have been used to help children with property deposits (without increasing the divorce risk), education fees funding, drawn as loans to fund retirements (without having to downsize or complete equity release), skipped generations, and used to cover muliple family bequests (thereby simplifying the list of beneficiaries in a will). They have also, all, avoided huge amounts in tax and will continue to do so for as long as they run.
If there is a chance of a future inheritance, remember this tip and ask your adviser or solicitor about it when the time comes.