If your estate is subject to inheritance tax (IHT), your beneficiaries will have to pay 40% of the taxable amount of the estate to the government, which will seriously diminish how much they will inherit. If you are leaving your estate to your children, you are very unlikely to want this to happen.
The taxable amount of your estate is anything above the nil-rate band (NRB) and the residence nil-rate band (RNRB). Your current NRB is £325,000 per person. Anything you pass to you spouse or civil partner will be exempt from IHT. If you leave your entire estate to your spouse or civil partner, your unused NRB can be claimed by your executors, allowing £650,000 to pass to your heirs, tax free when you die. Since 2017, you are also entitled to an RNRB if you leave property (your main residence) to your direct descendants. The RNRB started at £100,000 per person. It increased to £125,000 in 2018a and will continue to increase by £25,000 per year until 2020/2021, when it will be £175,000, which means that you will be able to leave £500,000 free of IHT to your direct descendants. As with the NRB, this can be passed to your spouse or civil partner.
In order to reduce the amount of inheritance tax people pay, parents often consider entering into various arrangements, such as trusts. However, a book published recently by Manny and Brigitta Davison – “To Trust Or Not to Trust” – gives a heart-breaking account of what can happen when things go wrong with such arrangements.
The Davisons worked hard and built a business empire from nothing. In 2006 Mr Davison reputedly sold his stake in his property holding company for £253 million.
Like most parents, the Davisons wanted to give their children the best life possible. They were privately educated, lived in beautiful homes and enjoyed luxurious holidays. In an attempt to ensure their children had an income, the family wealth was protected for future generations and inheritance tax was minimised, the Davisons put a substantial amount of property and other assets into trust.
However, according to the book, the children began to use the property held in trust, which included Lyegrove – a Jacobean manor house, as their own and wanted autonomy from their parents.
Legal action commenced, and although a settlement was reached, the parents are now estranged from their children and say they have effectively been banned from their beloved home at Lyegrove. The children have, through their lawyer, dismissed the book as lies. Whatever the truth, the parents’ attempts to protect wealth for the future benefit of their children has created family rifts that may never be healed.
There are a number of legitimate ways in which inheritance tax can be minimised, but it is important not to let the tax ‘tail wag the dog’ and end up getting it wrong. If you are concerned about IHT issues, contact Atherton Godfreys’ experts now. The advice we offer is professional whilst being down to earth and making you aware of any possible pitfalls.
Author: Katy Burgin