IHT is often referred to as the Double Whammy’. It is the continued application of Inheritance Tax on assets which are bequeathed to a Beneficiary and thus increasing their own personal wealth (estate).
This may mean that IHT has to be paid again on the inherited assets on death and this will continue through future generations.
Who is affected? Everyone whose Will does not include Trusts and whose assets are passed to Beneficiaries.
An example of the effects of Generational Inheritance Tax
Assuming the available Ni Rate Band (NRB) to currently be £325,000 at time of death.
Mr Smith dies leaving an estate of £1 million. No gifts have been made in his lifetime, and he leaves 1 daughter.
£1,000,000 less NRB (£325,000) = £675,000
IHT is now due on the £675,000 at 40% = £270,000
Net Estate now due to the daughter = £730,000.
The daughter already has assets valued at the NRB (£325K) and has one son.
So now her Estate is valued at £325,000 plus her inheritance of £730,000 = £1,055,000.
On her death she leaves her Estate to her son
£1,055,000 less NRB (£325,00) = £730,000
IHT is now due on the £730,000 at 40% = £292,000
Net Estate now due to son = £763,000
So, in just two generations £270,000 + £292,000 has been paid in Inheritance Tax. A massive £562,000 Tax Bill
Of the original £1 million Estate, a mere £438,000 remains for the Grandson.
Mr Smith writes a Will incorporating Trusts for his £1 million estate.
He has 3 Pilot Trusts (Trusts established in Lifetime outside of the Will)
Why 3 Trusts? As each Trust can hold up to the NRB rate, therefore £730,000 (net estate) divided by 3 = £243,333 in each Trust
No gifts made so Net Estate available for Daughter will be £730,000 (as per previous example)
Daughter and Grandson are potential Beneficiaries of all three Trusts, none of whose assets held will become part of the Estate for IHT, Care Home Costs or be at risk to future divorce settlements, or Creditors.
So, on the death of the daughter, of the original £1 million estate £730,000 remains protected for future generations and we have saved the client a massive £292,000 in Inheritance Tax alone.
If you would like further information to discuss your own requirements,
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This Article contains only general planning and is not to be construed as advice for any personal planning. Each strategy recommended is based on individual circumstances