How Trusts help avoid the IHT double whammy

Are you passing an inheritance tax time bomb to your children?

Many of us will have to pay inheritance tax at the end of our days but at least there should still be a tidy sum passed on to our beneficiaries. But if our kids have also done well the money you leave may push their own wealth into inheritance tax territory, too.

Let’s say divorced Mr Jones leaves an estate of £650,000. After his personal allowance of £325,000, his estate pays IHT at 40% of £325,000 = £130,000. His only daughter therefore receives £520,000 from her father’s estate.

Miss Jones already has an estate worth £325,000, so her own wealth increases to £845,000 and when she passes away there will be an IHT bill of £208,000. So in just two generations, the Government has received £338,000 in inheritance tax (£130,000 + £208,000) and of Mr Jones’s original £650,000 estate only £312,000 remains for his grandson.

The Solution:
Mr Jones does have to pay IHT on his own estate but, if he leaves his money in trust to his daughter and grandson, the £520,000 inheritance does not add to Miss Jones’s estate for IHT assessment, saving a massive £208,000. The money is also protected against various other threats to Miss Jones’s family wealth. MVL Why You Need Trusts