How to protect your children from paying too much IHT

Have you heard of Spousal Bypass Trusts? It’s not a trust to bypass your spouse; it’s to do with Inheritance Tax Planning (IHT).

It’s easiest to explain with a case study of a very unlucky imaginary family.

John and Michael are identical twins, who both work at the same company, where they have a pension scheme that pays 4 x salary if they die while in service. They are both married with children.

So far, so good.

Case study 1

Poor John. He dies in a bizarre gardening accident. In line with the pension scheme, the company pays his lump sum benefits to his wife Hillary.

But one year later, oh no, Hillary dies in a bizarre hang-gliding accident. The children inherit everything in her estate, including their dad’s lump sum. They have to pay 40% IHT on any amount above the current allowance of £650,000 (2 nil rate bands of £325,000).

Lucky taxman.

Case study 2

Guess what, Michael died in the same gardening accident as his twin. But that’s where the similarities end. You see, Michael had set up a Spousal Bypass Trust, so in his case the company pension scheme pays his lump sum to the trustees.

If she wants to, his wife Mary can access the money in the form of a loan from the trustees.

But then Mary dies in the same hang-gliding accident as her sister-in-law (I told you they were a very unlucky imaginary family).

Their children inherit all her money, and pay 40% inheritance tax on anything above £650,000 as usual.

They also inherit their father’s death-in-service lump sum that’s been held in the Spousal Bypass Trust. This is not included in their mother’s estate, and it is protected from IHT.

Lucky children.

The advice bit

If you are married or in a partnership with children, and have a company pension that pays out if you die in service or a personal pension, we recommend you set up a Spousal Bypass Trust.

We also recommend you set up a trust for your life assurance policies.

Trust us. It’s good advice!

Obviously, it’s a bit more complicated than that, so for more information, please give us a call on 01435 863787.

Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100