What is generational Inheritance Tax?

Inheritance Tax (IHT) is a familiar part of the UK tax system. It’s generally charged at a hefty flat rate of 40% on any of your worldwide assets if you are domiciled in the UK. But there is an associated catch – generational Inheritance Tax.

Defining Generational Inheritance Tax

Generational Inheritance Tax happens when an estate is taxed multiple times as it moves between generations. This might take place when money passes to your children, and then on to their children. This could mean that your children, and even your grandchildren, might face an additional Inheritance Tax bill over and above that which you’ve paid already. The outcome is that up to a staggering 60% of your estate’s value could be lost over time.

Generational Inheritance Tax generally applies if you and your spouse have something called mirror Wills. Mirror Wills are just that – virtually identical documents in which you leave all of your assets to your spouse or partner and then to your children, and your partner or spouse does exactly the same.

An example of the effects of Generational Inheritance Tax

Mrs Cousins dies leaving her estate of £750,000 to her daughter. The estate attracts Inheritance Tax with the Cousins’ daughter inheriting the remainder.

£750,000 – £325,000 (Nil Rate Band – the current allowance free of IHT) = £425,000
IHT bill at 40% = £170,000
Residual estate passed to the Cousins’ daughter = £580,000

Mrs Cousins’ daughter passes away six years later, leaving her entire estate to her son. Her assets already stood at £350,000, plus her inheritance from her mother, creating an estate worth £930,000.

£930,000 – £325,000 (IHT allowance) = £605,000
IHT bill at 40% = £242,000
Net estate now due to son = £688,000

Total IHT bill in two generations of £170,000 + £242,000 = £412,000

Preventing generational Inheritance Tax

Careful planning can help you prevent generational Inheritance Tax.

How The Fry Group can help with generational Inheritance Tax

Inheritance Tax is one area of estate planning in which careful preparation can make a significant difference. Taking certain steps can help reduce or even eliminate your IHT bill, and your descendants in years to come. To discuss your plans please contact your nearest office.

Would you like to find out more?

We are here to help with your tax planning requirements. For more information, whatever your circumstances, please contact us today.