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Inheritance Tax (IHT) represents a huge burden on many estates but, with the right professional advice, there are effective ways of reducing it. In one case on point, a High Court ruling had the effect of cutting potential IHT liabilities in respect of a wealthy widow’s estate by as much as £3.2 million.
The woman, aged in her 70s, suffered from early onset dementia and was agreed to be incapable of managing her own affairs. Her husband, a successful businessman, had left her very well off and her estate was estimated to be worth £18.65 million. If she died immediately, that would give rise to an IHT liability of about £6.2 million.
Her son and sole surviving child managed her affairs under an enduring power of attorney. After taking legal advice, and with a view to IHT mitigation, he applied to the Court to authorise a number of lifetime gifts from his mother’s assets, including £6 million to himself and substantial donations to various charities.
In authorising the gifts, the Court noted that they reflected the terms of the widow’s will in that the beneficiaries of both were the same. She had engaged in tax planning before she lost capacity and the evidence indicated that the gifts were consistent with her wishes, feelings, beliefs and values.
The gifts were amply affordable in that the widow would retain about £10 million in assets, more than enough to pay for her continuing care in a private nursing home. The effect of the gifts would be to reduce IHT liabilities on her estate to about £5.6 million, were she to die today, and about £3 million if she lived for another seven years.