Some Case Studies on How to Minimize Inheritance Tax

Listed below are some Case Studies that you may find very useful.

Case Study 1 - Business Owners

Pay NO Inheritance Tax (IHT) on the value of your business!

Paul Jones owned an insurance company which provided insurance cover for "mega-yachts" (like Abramovich's yacht in Monaco). The business was worth 4 million. His will left the total business to his wife.

We changed the will to leave his business to a series of discretionary trusts of which his wife was a beneficiary of each. This will save his family 1.6 million IHT, because if his old will applied and his wife sold the business after his death, the proceeds of sale would no longer benefit from Business Property Relief (BPR) (100% relief against IHT).

By leaving the business to the trusts, the benefits of Business Property Relief was preserved even when the business was sold

The trust used is called a Pilot Trust.


Case Study 2 - Unmarried Partners

Protect both your children and your inheritance!.

Paul Jones lived with his partner Susan Smith for 20 years. They had a combined estate of 1 million split equally between them, and had two young children.

When Paul died, IHT would have been payable by Susan on his 500,000 estate
(500k - 325k (NRB) = 175k taxed at 40% = 70k IHT).
As Paul had left his estate to Susan by his will, she would have been left with an estate of 930k (after paying Paul's IHT).
When Susan died IHT of 242k would have been payable (930k - 325k (NRB) = 605k @ 40% = 242k IHT).

We changed Paul's will so his estate went to a series of discretionary trusts of which Susan is the beneficiary. As a result when Paul died, his estate did not get added to Susan's estate. As a result when she dies, IHT of only 70k would be payable
(500k - 325k (NRB) = 175k @ 40% = 70k IHT).

Saving IHT by using discretionary trusts in conjunction with Paul's will = 172k.

The trust used is called a Discretionary Trust.


Case Study 3 - Loss of Mental Capacity

How to protect your spouse and your children in the event of loss of your mental capacity caused by you having an accident, illness, disease or dementia.

Paul Jones, a young successful businessman, was seriously incapacitated in an accident. His wife Susan needed to sell their house as she could not afford the mortgage without his wages. As Susan cannot sell the house on her own she had to go to the Court of Protection/ Office of Public Guardian to get authority to sell.

This process takes several months and is very costly (over 1,000). More importantly she cannot be certain that she will be allowed to use all the net proceeds of sale to buy a new smaller property (the Court has power to set aside money for her husband's possible future needs!).

If Paul had created a Lasting Power of Attorney (LPA) the delay and cost of going to the Court of Protection/Office of Public Guardian would be completely avoided and Susan would be able to sell the house and buy another one of her choosing for herself and the children.

This is called a Lasting Power of Attorney.


Case Study 4 - For High Value Home Owners

Sell a share of your house to your spouse and save IHT.

Paul and Susan Jones had an estate of 1 million including two properties.

Their main home was worth 500k and they had a buy to let property worth 250k. Their IHT bill was 140k.

Paul sold a portion of his share of their home to Susan at market value i.e. for 125k. On completion day, Susan didn't pay the purchase money to Paul. Instead she signed a promissory note agreeing to pay Paul in the future.

Paul gave this IOU away to a trust that he had set up for the children. 7 years later this was outside of his estate and their IHT liability was reduced by 50,000. Susan did the same on their buy to let property. Another 50,000 was therefore knocked off the IHT bill.

This is called an Inter Spouse Transfer.


Case Study 5 - For Home Owners

Make sure your children/beneficiaries save Inheritance Tax (IHT) on your main property.

Susan Jones was a widow. She had an estate of 1 million, including her main home worth 750k. When she dies there would be IHT to pay of 140k
(1 million - 650k (2 x 325k NRB) = 350k @ 40% = 140k).

If she gifted the property to her two children, this would not save IHT as it would be treated by the taxman as a gift with reservation of benefit (GROB).

Both Susan's children still had a bedroom in her house (which had been their family home when they were children) and they still use on occasions, especially at Christmas and Susan's birthday. They still kept belongings at the property. Susan will produce a Statutory Declaration which would confirm that she was Sharing Occupancy of the property with her children.

She can then gift part of her property to her children and this will not be a GROB. If she gifts one-sixth share to each of her children (and then lives for 7 years) she will save 100,000 IHT.

The trust used is called a Shared Ownership Scheme.

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