A Finance Daily member looks for advice from the experts about how he can lessen his inheritance tax bill.

Question

When my Dad dies I stand to be in debt due to inheritance tax by £40,000 as my Dads net wealth is £385,000 at present which includes our house and a small field, and also an invested legacy left to him by a relative, however neither the capital or any dividends from the investment will pass to me on his death but I will be taxed on half the value of the capital, as if the inheritance tax on the property wasn't a kick in the teeth enough, I have to pay for what he has had the benefit of for all these years. Can I do anything about this situation to minimise my massive tax bill?

What the Experts Say

Donna Bradshaw of IFG Financial Services (www.ifg.co.uk) responds;

First of all, the Inheritance Tax (IHT) due will be on your father’s estate, meaning that it is his money on which the tax will be levied. Whilst it may seem unfair to you that tax will be payable out of the part of estate left to you rather than from the trust monies (this is a problem with this type of trust), it is still being taken from your father’s assets; be they in the form of buildings, land, cash, bonds or equities; and it is his estate that will pay the tax on, as you refer to it, ‘what he has had the benefit of for all these years’.

If there are insufficient liquid assets to pay the IHT due, the property and land could be sold and the proceeds used to pay it. If you wish to keep the property you would have to pay the tax due, however you would then own the asset.

It may be possible to mitigate any potential inheritance tax; however, it would depend on a number of factors, not least of which would be your father’s agreement to it. As a first step you should speak to your father about the situation and if he is happy to look at ways to mitigate IHT you should both then take advice from a good independent financial adviser.

Chris Wicks of the Alexander Beard Group Plc (www.abg.net) responds;

This raises a number of questions. You have used the phrase ‘our house’. Do you own part of it already? If so that will diminish the value of your father’s estate, depending on the way in which things were arranged between you.

With regard to the invested legacy I need to know whether this is held on trust for your father such that the income is paid to him during his lifetime but the capital reverts to someone else on his death. If this is the case whilst the capital is brought into account when calculating the inheritance tax on your fathers death it is the trustees who are liable to pay the tax on their share, not you. The inheritance tax is pro-rated between you and them if you are the beneficiary of the remainder of the estate. The current nil rate band is £300,000 so the balance of £85,000 will be subject to tax at 40% i.e. £34,000. If the estate were equally divided between the assets passing to you and the trust your share would be £17,000. This will only be payable when you receive your share of your fathers estate. If you stood to get nothing you would have no tax to pay as the trustees would be liable for the full tax bill.

You may be able to arrange life cover on your father’s life to deal with the inheritance tax that you will suffer on his estate. This depends on his state of health. This should be placed on trust so that it passes outside his estate.

Daniel Clayden APFS – Director, Clayden Associates (www.claydenassociates.co.uk) responds;

To be quite honest I’m a bit confused about your situation! I assume that your father has not died yet and if this is the case, he will potentially be in a position to make plans in order to help minimise any potential IHT liability … but because any tax liability would be based on the value of his estate it is only he who can do something about it.

If the value of his estate has not increased the current potential IHT (Inheritance Tax) liability will already be less than the £40,000 figure quoted. This is due to the fact that the Nil Rate Band was increased to £300,000 from 6th April 2007, and so the current bill on an estate of £385,000 would now be £34,000.

It isn’t clear whether you live with your Dad or whether he owns the house that you live in. But you have mentioned that he owns a small field and there is the possibility that (depending on specific criteria set down by HMRC – Her Majesty’s Revenue & Customs) the value of the field would qualify for agricultural property relief, which may reduce the potential IHT liability even further.

The most puzzling aspect of your circumstances surrounds the situation in respect of your father’s investment. It seems to me that your father must have established some type of life interest trust arrangement as this is normally the only reason that would cause you to be liable to tax on half of the value of the capital.

As the life tenant, you would be entitled to the income element of the investment but not the capital, as this would revert to the remaindermen on the life tenant’s death.

Alternatively if the other beneficiary is the life tenant then they would be entitled to the income during their lifetime and then the capital will revert to you on their death. If this is the case it seems that your Dad has established this type of arrangement (normally as a part of a will) in order ensure that you will be the eventual beneficiary of this money, while looking after the interests of another beneficiary (who may be financially dependent) in their lifetime. Life interest trusts are quite a common way for people who have remarried to support their spouse but ensure that the assets eventually pass to their children.

Assuming your Dad has fully utilised all of his allowances and is not prepared to make an outright gift of any of his assets (bearing in mind the fact that if he lives with you, gifting of the family home would be deemed a gift with reservation - something to be avoided at all costs!) he could consider insuring the potential liability by effecting a life insurance policy, with the sum assured set at the same level as the liability and the death benefits written under trust. The premium of such an arrangement would almost certainly fall below the £3000 annual gift allowance, otherwise it may be exempt as a gift out of income exceeding expenditure.

I would definitely suggest that you discuss matters with your Dad, and together sought advice from an Independent Financial Adviser for an unbiased recommendation suited to your individual circumstances.

Find an Independent Financial Adviser, Click Here

To read more financial questions answered by the experts, View the Archive