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10 September 2011

How can I cut the IHT burden on my estate?


I am a retired widower in my 70s. I inherited my wife’s estate when she died 15 years ago. It is worth around £5m – half of which is the property that I am living in, and the other half is cash, which I am living off. I would like to leave my estate to my two children and six grandchildren, but I am concerned about the inheritance tac (IHT) bill. Is there anything I can do to reduce the tax payable?


Helen Freely, partner at Druces LLP, says that if you do nothing, the IHT would be approximately £1.74m. This is calculated by subtracting your nil-rate band of £325,000, plus your wife’s transferable nil rate band of the same amount, from the £5m net estate. That leaves £4.35m that would be taxed at 40%: a tax bill of £1.74m.


One way to reduce this IHT bill is to give away some of your estate to your children and grandchildren. As long as you survive for seven years, the gifts will fall outside your estate for IHT purposes. However, this could mean downsizing your property, so there are clearly other factors to consider – such as whether the property is a family home of sentimental value that you don’t want to sell.


Another option is to consider rearranging your cash to produce more income in your estate. You could live off your income rather than capital, and have any extra income paid to your children and grandchildren. Gifts from this income – provided they are regular and obviously surplus to your needs – fall outside your estate for tax purposes. This second option may be more favourable – especially if your health is not good, and you think it unlikely you will survive seven years.


A third tax-saving opportunity, announced in the 2011 budget, is to donate to charity. George Osborne, the Chancellor of the Exchequer, announced there will be a reduced rate of IHT of 36 per cent from April 2012 for estates from which 10 per cent or more is bequeathed to charity. You could therefore leave £500,000 of your estate in your will to one or more charities. By doing this your taxable estate would be reduced to £4.5m.


You would still be able to utilise the two nil-rate bands totalling £650,000 leaving a balance of £3.85m to be taxed at a rate of 36 per cent. That gives a tax bill of £1,386,000, saving £354,000 in tax.


If the idea of giving £500,000 to charities unnerves you, you may like to set up a family charitable trust in your lifetime, and leave ten per cent of your estate to that trust. Typically you would set up a charitable trust in your family’s name – for example Smith Family Charitable Trust – to hold a small amount of money initially. You and your children could be the trustees, and you can determine which charities or causes you would like to benefit from the trust.


You can specify individual charities, or general causes such as “to further the education of children with learning disabilities”. In your will, you would then leave 10 per cent of your estate to the Smith Family Charitable Trust.


After your death, the trustees can donate to charities of your and their choice – provided these donations stay within the remit of the trust deed. Many testators like this form of charitable giving as, not only can you leave a lasting legacy, but you also save on IHT.


Source: FT 24.09.2011


*Article for guidance only. Professional advice should be obtained to ensure that all circumstances are assessed in providing a complete answer.