The Effects of Generational Inheritance Tax (IHT)


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.


The effects of Generational IHT

Assuming the available Nil Rate Band (NRB) to currently be £325,000 at time of death and Residence Nil Rate Band (RNRB) of £175,000.

Dad dies leaving an estate of £1 million including his main
residence with a value of £350,000. No gifts have been made in his lifetime. He leaves behind 1 daughter.

£650,000 – NRB (£325,000) = £325,000.
£350,000 – RNRB (£175,000) = £175,000.

IHT is now due on the £500,000 at 40% = £200,000.
Net estate now due to the daughter = £800,000 

The Will leaves this estate to the daughter.

The daughter already has assets valued at the NRB (£325k) and
has one son. 

So now her estate is valued at £325,000

(of which £175,0000 is her main residence) + £800,000 inheritance from Dad = £1,125,000.

On her death, after the application of the RNRB (£175,000) and NRB
here is a £625,000 excess subject to IHT @ 40% = £250,000.

So, in just two generations £200,000 + £250,000 has been paid in Inheritance Tax. A massive £450,000!
Of the original £1 million estate, a mere £550,000 remains for
the grandson!

Our Solution

  Dad writes Will incorporating Trusts for his £1 million estate. No gifts made so net estate available for daughter will be £800,000. 

3 Pilot Trusts (Trusts established in lifetime outside of the Will) established to receive 1/3 of net estate.

Daughter and grandson are potential Beneficiaries of all three Trusts and grandson is ‘default’ IIP beneficiary for RNRB. None of whose assets held will become part of their estates for IHT, Care Costs or be at risk to future Divorce settlements, or Creditors

So on the death of the daughter, of the original £1,000,000 estate £800,000 remains protected for future generations with a
massive £250,000 saved to IHT alone!

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