Inheritance Tax has always been a threat to large estates but is now affecting more moderate estates, due largely to the increase in house prices combined with a freezing of the tax-free amount (the Nil Rate Band) since 2009.

However, with careful, advanced planning there are several things you can do to mitigate this.

One of the common solutions is to gift money into trust or directly to loved ones and hope to survive 7 years. However some people don’t want to give their money away or sadly don’t think they will live 7 years. Whilst you can insure your life for the amount of IHT expected to be payable, many people cannot get insured if they are in poor health.

Case Study Example 1

Mr and Mrs W were both 76 and lived in a high-value house which, when combined with their investments, meant their children would have to pay Inheritance Tax on second death. They could solve the problem if they gave away their savings and survived 7 years. But they did not wish to do so. So, we recommended a life assurance policy which would pay the tax bill when they died. This meant they could still enjoy their savings without worrying about the tax bill.

Case Study Example 2

Mrs W was 92 and there would be considerable Inheritance Tax to pay on her death. She decided to gift a sizeable lump sum to her family to solve the problem. The only problem was that she would need to survive 7 years before the gift was outside her estate or 40% of it would disappear in tax and she wasn’t confident she would survive another 7 years. So, we recommended a specialist investment that would be tax-free after 2 rather than 7 years. Mrs W died 3 years later and there was no Inheritance Tax to pay.

Case Study Example 3

Mrs R was 76 and realised that to avoid paying Inheritance tax on her death, she needed to gift £180,000. She was in good health and thought she could survive for 7 years. However, she felt uncomfortable giving this amount of money away just in case she needed to go into a care home. So, we placed the money into a 2-year Inheritance Tax plan. As it is still her money, she can access it whenever she wants. After 2 years, whatever is still in her plan will be exempt from Inheritance Tax.

Case Study Example 4

Mr and Mrs R were 71 and 68 years old. They had capital which they wanted to give to their children but were scared that they might need it back if they needed care in later life. We recommended a lifestyle trust which gave them the option to take a pre-determined annual income or indeed defer it. Several years later, they have the ability to take everything they are owed but chose not to take, if they need care. If the money stays in the trust, after 7 years it is outside the estate for Inheritance Tax.

Case Study Example 5

Mrs D was 82 years old. She had a capital sum, needed a regular income and wanted her children to avoid Inheritance Tax. We recommended a Discounted Gift trust. This type of trust gave her an immediate discount for Inheritance Tax as well as a guaranteed annual income of 5% of the original capital, paid monthly. She is now 87. To fully escape IHT, she needs to live for a further 2 years. If she does not, a significant amount of the original capital is already IHT exempt, as is the growth in the value of the investment.

Case Study Example 6

Mr and Mrs P were 66 and 67 years old. They lived in an expensive house but had little savings or investments, yet they wanted to minimise IHT. They did not want to downsize. So, they opted for an interest only mortgage and gave the amount raised (£250,000) to their children. Whilst they are paying the interest of around 4%, the children have invested the capital and are gaining a much higher return. After 7 years, the capital is outside the estates of Mr and Mrs P and they have saved £100,000 in IHT. When they get older, they could switch to an equity release product. Whilst this means the interest will be rolling up, it will be reducing the value of the estate and the original £250,000 is being of great use to the children right now.

Case Study Example 7

Mr E wanted to gift his son £200,000 but like Mr and Mrs R above, he was scared it would leave him with no capital if he needed care. We recommended a loan trust. He placed £200,000 into the trust and it has been growing at around 10% per annum. 100% of all growth from Day 1 is outside of his estate for IHT. The original £200,000 will always be in his estate but the growth will not. After 20 years, if the trust compounds growth at 10% per annum, the amount inside the estate would be £200,000 and outside the estate would be £1,145,500. If it compounded at only 5% per annum, it would be £330,660. He can get back the £200,000 whenever he wants.