IHT Planning
The People
Mrs R was a widow. She owned a property worth £1.5 million and limited other assets. She lived in the house with one of her three children and his wife and their two minor children.
The Problem
On Mrs R’s death, her estate would be entitled to her own nil rate band allowance of £325,000 and her executors can claim a transferable nil rate band from her late husband, leaving her an available Inheritance Tax (IHT) nil rate band of £650,000. The balance of her estate in excess of that sum would be subject to IHT at 40%, therefore an IHT bill of about £340,000.
The Solution
As Mrs R’s son lived with her and intended to continue living with her until she died, she made a gift to him of a half share of her house.
If she were to survive seven years, that half share would fall outside her estate for IHT purposes. Her estate would then be worth £750,000. After deducting the available IHT nil rate band of £650,000, IHT of £40,000 would be payable, representing an IHT saving of £300,000.
If she were to die within seven years, a smaller IHT saving may be made. Any increase in the value of the half share of the property would be outside of Mrs R’s estate and so free of the 40% IHT charge. Life insurance could be taken out for the 7 year period to cover the potential IHT that might become payable if she were not to survive for that length of time.
Who to contact
Paul Tobias
Senior Partner, Head of Trusts & Investments
Email
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