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Sensible Inheritance Tax Planning

By Barry Davys
This article is published on: 17th July 2023

One of the principals of financial planning is to keep things as simple as possible. Often that is easier said than done. Often, trying to plan in the context of unknowns means we have to try to cover a number of options. Examples include what will future investment performance be, which country will you live in in the future, how many children and grandchildren will you have and indeed, how long will you live?

One piece of planning that is quite straightforward is a piece of planning for passing wealth onto your children when one lives in the UK and the other in Spain. As an example let’s use the family called the “Sensibles”:

  • Mr & Mrs Sensible live in the UK
  • Child Sam Sensible lives in Spain
  • Child Una Sensible lives in the UK
  • In Spain there is gift tax if money is given to Sam during Mr & Mrs Sensible’s lifetime
  • In the UK, there is no gift tax
  • In Spain, the recipient of money from a Will has to pay Inheritance Tax (IHT)
  • In the UK, it is the estate of the person who has died that pays the IHT
  • Mr & Mrs Sensible wish to do some UK IHT planning and give money to their children now

The problem for Mr & Mrs Sensible is that if they give money to their children now, this will lead to Sam in Spain having to pay Gift Tax now. If they leave their money to Sam in their Will there are allowances and discounts available which means that he will pay less tax than in the event of receiving a gift.

The Solution
The solution is quite straightforward. Mr & Mrs Sensible should give the total amount of money they wish to give to Una in the UK now. This will reduce their future liability to UK IHT. To make sure Sam and Una are treated the same they should then deduct the amount given to Una from her half in their Will.

  • Sam pays no gift tax and Una pays no gift tax
  • Sam pays less tax on the death of his parents because of the discounts available on IHT for bequests from parents to children
  • Mr and Mrs Sensible have reduced their UK IHT bill

What a sensible thing to do.

Article by Barry Davys

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