The late Duke of Westminster saved his family billions of pounds by using a trust that allows wealth to pass through the generations without attracting a large inheritance tax liability.
The Duke died in August leaving an estate valued at £9bn. It’s thought nearly all of that wealth will pass to his son Hugh without triggering death duties.
This is because under a complex trust structure, the family are trustees of the assets rather than direct owners. This means the family wealth is kept outside their individual estates for inheritance tax purposes.
Of course, few people have wealth that comes anywhere near that of the Duke and his family but even more modest estates can benefit from the careful use of trusts and inheritance tax planning.
Inheritance tax is set at 40% and becomes payable once the tax free allowance of £325,000 has been passed.
An additional main residence allowance of £100,000 will be introduced in April 2017. This will rise gradually to £175,000 by 2020.
When added to the £325,000 nil-rate band for inheritance tax, this will eventually provide a combined tax-free band of £500,000 by 2020. Married couples can combine their allowances. When one partner dies, their share of the estate is passed on to their spouse free of any inheritance tax.
This means that by 2020, a married couple could have a combined allowance of £1m.
In some circumstances, it may be possible to set up a trust to further reduce inheritance tax liability.
Another way to pass money on without inheritance tax implications is to adopt the ‘little and often’ approach. This allows you to give away £3,000 per year tax free. It’s a useful way to give money to your children without them running the risk of having to pay tax on it when you die.
There is also a ‘seven year gift rule’ which allows a person to give money or assets of unlimited value. The recipient will not pay inheritance tax as long as the person lives for at least seven years. If the person dies within seven years of making a gift then the recipient could be liable to pay the 40% inheritance tax, depending on the value of the estate.
These are just some of the ways you could reduce inheritance tax liability. A little planning now could save your families thousands of pounds in the future.
Please contact us if you would like more information about the issues raised in this article or any aspect of inheritance tax planning.