"I received a lump sum on my mother’s death in
December 2007. I divided the money up between buying a half-share in a two-bedroom flat; reducing the mortgage on my daughter’s
property; and low-risk stocks and shares with Nationwide.
"Together with owning my own home and the settlement from my divorce, my whole estate value is very high. My concern is the taxman, and I would also like to reduce the inheritance tax bill my three
daughters would have on my death.
"I’m thinking of putting a lump sum in a seven-year trust for each of my daughters to reduce the
estate, but this will still leave £379,000, from which the taxman would receive 40%.
"My financial adviser suggests I
declare this amount, receive a bill for the IHT now and pay it off at £3,000 a month from the interest earned on my stocks and shares. That way, on my death, the girls will have no IHT bill to pay. I haven’t heard of this before."
Ask the Professionals: Charles Hutton, a partner at Speechly Bircham specialising in inheritance tax planning, says:
I’m not sure what your financial adviser means by declaring this amount now, receiving a bill for the IHT and paying it off as a monthly sum. It may be that he’s suggesting that you take out a life policy (written in a suitable trust) for a sum sufficient to meet the IHT liability on your death, and that you pay monthly premiums.
Certainly, life insurance may form part of the overall tax-planning strategy, but there are other possibilities too.
If the money you have paid on your daughter’s property is a gift to her, then that falls out of estate once you have survived the gift by seven years, thus reducing your liability.
You have also bought a half-share in a two-bedroom flat. If you don’t need access to the rental income or the proceeds if the property is sold, then you could give this away.
If the flat has gone up in value since you acquired it, then your gift may trigger capital gains tax (CGT). It may be possible to defer the CGT by giving your share of the property to a trust for your adult children.
If we were still within two years of your mother’s death, you could have varied her will to pass assets direct to your daughters without the usual seven–year run off (or arranged matters so that you could still use the money you had inherited, but without it being taxed on your death).
Either approach would have saved £120,000 of IHT with immediate effect if your inheritance was £300,000.
Other possible ideas – although you would need to take investment advice before considering them
further – include a discounted gift plan or a gift-and-loan scheme.