Problem
My Mum has just passed away and I need to pay Inheritance Tax. I think my family will need to pay Inheritance Tax when I die too. Is there anything that I can do?
Jenny was in the process of applying for probate on her Mum’s estate when she realised that she had a £40 000 Inheritance Tax (IHT) bill to pay. After the bill was paid this would leave Jenny with a £1,160, 000. When we sat down with Jenny and her husband, we calculated their joint assets to be £850,000 (before any inheritance). Prior to Jenny’s inheritance from her Mum, Jenny and her husband Peter would have no IHT to pay using the calculations below:
- Each individual has a IHT allowance of £325, 000
- Jenny and Peter own their own house valued at £390,000 and have children so they also each qualify for an additional £175,000 of IHT allowance
- This gives both Jenny and Peter an IHT allowance of £500, 000 or a combined allowance of £1,000,000
- With Jenny’s inheritance from her Mum, Jenny and Peter now have combined assets of £2,010,000
- minus their allowance of £1,000,000 leaves £1,010,000 on which there would be IHT to pay at 40%
- This would mean that if Jenny an Peter died today, their children would have an IHT bill of £404, 000
Solution
We spoke to Jenny about a Deed of Variation. A Deed of Variation, reallocates a person’s inheritance to another entity. This could be another person but our solution is to allocate the funds to a trust. Assets can then be distributed from the trust.
The whole of Jenny’s inheritance was placed into a Deed of Variation Trust. Jenny is able to spend money as she wishes but the trust assets are not in Jenny’s estate. Peter and Jenny are now back in the position of having no IHT to pay when they die. The money from Jenny’s mum is safe via the trust and can pass to her children without IHT and with added protection for both Jenny and her children against divorce, creditors or other threats to the money.