The Effects of Generational Inheritance Tax
What is Inheritance Tax (IHT) ?
IHT is often referred to as the Double Whammy! It is the continued application of Inheritance Tax on assets passed down the family line. In other words it gathers in size as it cascades down from one generation to another.
Who is affected? Everyone whose Will does not include Trusts and whose assets are passed absolutely to Beneficiaries.
An example of the effects of Generational IHT for Single Person / Divorced
Mr Brown dies leaving an estate of £1 million and he leaves behind 1 daughter. Therefore £1 million less the NRB (tax free allowance) of £325,000 = £675,000, which means IHT is now due on this amount so £675,000 at 40% = £270,000 tax bill.
Therefore the daughter receives £730,000 via Mr Brown’s Will.
The daughter already has assets valued at £325,000 and has one son. So now her estate is valued at £325,000 plus £730,000 inheritance from her father = £1,055,000. On her death after the application of the Nil Rate Band of £325,000 there is a £730,000 excess subject to IHT of 40% = £292,000.
So in just two generations £270,000 AND £292,000 has been paid in Inheritance Tax. A massive £562,000!
Of the original £1 million estate, a mere £438,000 remains for the grandson.
If only Mr Brown had been our client – He would have written his Will incorporating Trusts for his Estate and stating his Daughter and Grandson as the Beneficiaries therfore the Trusts would receive the net estate of £730,000 and so does not fall into the Daughter’s and Grandson’s 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 £730,000 remains protected for future generations with a massive £292,000 saved in IHT alone!