Can my children avoid having to sell my assets when I die to pay the inheritance tax?

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Reader’s Question:

I am not married, due to a divorce some years ago. I have worked hard for my assets and would like to make sure they are passed on to my 3 children when I die. My home is worth about £7000,00 and I have a property which I rent out worth £150,000 and some savings. How can I make sure that my children have my home passed on to them? My son aged 35 lives with me as he has some disabilities, but I am worried that the home would have to be sold to pay off my inheritance tax bill. Please could you advice me as it is a worry…thanks

My response:

A very interesting question.

For starters in order to ensure that your children inherit your assets in accordance with your wishes you need to make a will. For this you will need to see a solicitor.

With regard to the Inheritance Tax part of your question:

As you know Inheritance Tax (IHT) is levied on an estate when someone dies, but only on the amount over £325,000 (for 2010/11). Clearly your estate is already over that and assuming that you haven’t got any IHT planing in place (and assuming no exemptions) you estate’s IHT bill is likely to be in excess of £210,000.

On your death the executor of your will will pay any IHT due from your estate. That may well mean having to liquidate assets such as property. In your case it may mean that they are able to just sell your investment property and use some of your savings to meet the bill..

Given the size of of your estate, and your concerns over your son, I suggest that you seek legal expertise from a solicitor who has experience in inheritance tax and trust planning. Obviously it will cost you but the solicitor will arrange your affairs in the most tax efficient manor possible.

If you read my article 15 ways to slash your potential Inheritance Tax bill it will give you some ideas of how it is possible to cut an IHT bill, but as I said also seek expert advise.

The simple life insurance trick

But there is another simple solution to the problem. The IHT bill is obviously only payable upon death so it is possible to take out life insurance on your life with a sum assured equal to at least your inheritance tax bill. If the policy is written in trust for your beneficiaries then in the event of your death the life insurance policy will pay out. But this will be outside of your estate and can be used by your beneficiaries to pay the IHT bill. They can then receive your assets without having to necessarily sell them.

Obviously a financial adviser can tell you the type of life insurance policy that suits your needs. But it will likely be either a term assurance policy or a whole of life plan. A term assurance plan will pay out the sum assured (i.e. equivalent to the potential IHT bill) if you die within the term.. Obviously the longer the term the more expensive the policy. A 10 year term is obviously more expensive than a 5 year term contract. A whole of life contract on the other hand will cover you until you die. Obviously this is much more expensive.

It may be that a life insurance policy can be used as part of your IHT solution or as a stop gap, to stop your worrying, until you get your affair in order. Speak to your financial adviser. The other benefit is that life insurance can be relatively cheap depending on your age and health.

Image: Filomena Scalise / FreeDigitalPhotos.net


About Damien

Damien is one of the most widely quoted money and investment experts in the national press and has made numerous radio & TV appearances. He created MoneytotheMasses.com while working in the City when he became disillusioned with the way the public were left to fend for themselves because they could not afford financial advice.In 2014, after publishing his first book '30 Day Money Plan - Fix your finances in just 5 minutes a day' Damien quit his day job to focus his efforts on MoneytotheMasses.com