IHT Wills case study
The People
Mr M and Miss L were an unmarried couple with two children and a joint estate worth £1 million. They had made Wills leaving everything to each other on the first death and then on to the children equally on the second death.
The Problem
If Mr M died, Inheritance Tax would be charged at 40% on any balance transferred over and above the available IHT nil rate band. If, say, £70,000 IHT was paid on his share of £500,000, the balance (£430,000) would then be transferred to Miss L. Her estate would then be worth £930,000. On her death, IHT would be payable on the excess over the IHT nil rate band – i.e. IHT of £242,000. A total of £312,000 would be paid in IHT.
The Solution
Mr M and Miss L made Wills leaving assets to the value of their available IHT nil rate band to a discretionary trust with any balance left to the survivor of them.
On Mr M’s death, his IHT nil rate band of £325,000 would be left to the trust. The balance would then be payable to Miss L. IHT of £70,000 would still be payable, as indicated above. The sum left to the trust could be used by or lent to Miss L to be repayable on her death.
On Miss L’s death, her estate would repay the £325,000 loan to the trust. Her estate would then be worth £605,000. IHT would be payable on the excess over her IHT nil rate band of £325,000 – amounting to £112,000.
A total of £182,000 would have been paid in IHT – a saving of £130,000.
Who to contact
Paul Tobias
Senior Partner, Head of Trusts & Investments
Email
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