Generational Inheritance Tax 

Inheritance Tax is charged each time assets are passed on to the next generation. Over a number of generations this can mean your family gets virtually nothing, as most of what you owned ends up in the hands of the tax man. 

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Each time your assets are passed to the next generation another 40% is taken by HM Revenue & Customs. This is what we call “Generational Inheritance Tax”. 

This depletion of your assets continues each time they pass on to the next generation unless you take steps to stop it happening. 

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If your children have a taxable estate of their own, anything you pass on directly to them will be taxed at 40% if they then pass it on to their children, i.e. your grandchildren. 

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This might more easily be explained with an example. 

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Example – £1,500,000 through 2 Generations 

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Alan and Margaret have an estate of £1,500,000 which they want to pass on to their children and, ultimately, their grandchildren. 

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Alan and Margaret’s children have their own assets which exceed the Nil Rate and Residence Nil Rate Bands, and so everything they inherit from their parents will suffer Inheritance Tax. 

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Alan dies first.

 

Total Estate £1,500,000 

 

Margaret’s Nil Rate Band £325,000 

Margaret’s Residence Nil Rate Band £175,000 

Nil Rate Band inherited from Alan £325,000 

Residence Nil Rate Band inherited from Alan £175,000 

Total Allowances £1,000,000 

 

Taxable Estate £500,000 

 

Inheritance Tax @ 40% £200,000 

 

Total Estate £1,500,000 

Less Inheritance Tax £200,000 

Net Estate for their Children £1,300,000 

Less Inheritance Tax £520,000 

Net Estate for their Grandchildren £780,000 

 

Total Inheritance Tax Paid by Children & Grandchildren £1,500,000 

 

It is easier to reduce or even stop Generational Inheritance Tax than controlling Inheritance Tax in the first generation. What is required is advance planning.