I thought it would be worthwhile sharing a recent inheritance tax enquiry I received.
A few months ago, a new client came to me wanting to reduce their inheritance tax situation for their two children and at the same time wanting to draw an income.
Their total estate is currently £150,000 above the total allowance threshold of £850,000. Unfortunately, they both have health issues but they anticipate surviving for at least 7 years.
At present they can afford to make a gift of £100,000 but would like an income of £5000pa. They appreciated by doing nothing, their children could face an inheritance tax liability of £60,000.
The recommended solution was to invest £100,000 into Discounted Gift Trust using an Investment bond. The mother and two children become trustees, naming the two children as the sole beneficiaries.
The benefit of the advice given is that £60,000 is deducted from the estate and by doing so reduces the tax liability by £24,000. The remainder of £40,000 would be exempt from inheritance tax after 7 years and this would be saving of £16,000.
The capital investment growth would be outside the estate and this is paid to the children on the second parental death. The parents benefit from £5000pa of income with deferred taxation to help maintain their lifestyle. Over a seven year period, the inheritance tax saving would be £40,000.
There are other solutions for mitigating the effects of Inheritance Tax and this article is just one of many. As this is a specialist area of advice and it is important to seek out this information from an appropriate financial adviser. We have this specialist knowledge and are always available to answer your questions.
Nigel Taylor Cert PFS, Dip FA
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