Passing on Money - Inheritance Issues

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Inheritance Issues

Henry Brown has three children, all under the age of 18. He will leave almost everything to his wife, Margaret, but if she dies at the same time or before him, he wants his children to inherit. Henry makes his wife an executor of his will, since she is the person who stands to gain most from the will.

He also appoints as executor his friend Gordon Saunders, who will be guardian of his children if both he and his wife die. He appoints another friend as a 'reserve' executor.

Apart from two small bequests, there are legacies for the executors as a reward for their efforts. Henry specifies that the residue should go to his wife, but that if she dies before him or within 30 days of him, it will be left for his children. If the children are under 18, the executors will act as trustees.

Sam dies and leaves his whole estate of £200,000 to his wife, Harriet. Since this is a tax-free gift, there is no inheritance tax to pay. When Harriet dies, her free estate is valued at £300,000 and is left completely to their only child, Phyllis. There is IHT to pay on the estate calculated as follows:

• Value of free estate £300,000 less tax-free slice £234,000 £66,000
• Tax on £66,000 @ 40% £26,400

However, suppose instead that Sam had left £100,000 to Phyllis (on which no IHT would be payable because it would be covered by the tax-free slice) and the remaining £00,000 to Harriet.

• On Harriet's death, her estate would have been valued at £200,000.

Giving this to Phyllis would have been completely covered by Harriet's tax-free slice, so no IHT would be payable. Straightforward planning to make use of Sam's tax-free slice would save £26,400 in tax.