Barbara’s house is valued at £400,000, which means it has no IHT liability. But she has an additional £500,000 in cash and investments. She is currently living off the interest of the £500,000 to supplement her pension.
Her children face £200,000 of their inheritance disappearing in IHT which Barbara wants to reduce.
Following advice from Philips Trust Corporation, Barbara sets up a discretionary trust, gifting £300,000 to her children. Assuming she survives seven years this is a “potentially exempt transfer” (PET) and no tax is payable. What’s more, because the £300k is under the nil rate band, it does not attract an immediate IHT payment of 20%.
Acting on advice from Philips Trust Corporation, Barbara also sets an Family Income Company with her children and grandchildren as shareholders, all with equal minority shareholdings. She invests her remaining £200,000 and achieves an average fixed return of 5% (£10,000 per annum). This is higher than the interest she was earning on the £500k.
Because Barbara now takes her income from the investment as a director’s loan, she pays no tax. And, assuming she survives seven years, this has saved her children £200k in IHT.
Find out how we can help you to reduce IHT liability
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