Tax dodge of the week: a neat way to avoid inheritance tax

published 7 November 2007

One of the "starkest contrasts" in the whole of the tax system is between the treatment of most forms of trading-business assets (which are 100% free of inheritance tax) and all other types of assets that are liable to IHT at 40%, subject to the £300,000 threshold, says The Schmidt Report.

The good news is that it is possible to pass on assets tax-free by using a scheme known as double dipping'. Take the following example, in which a widow has been left all the shares in Trading Ltd, worth £1m, by her husband, in addition to £1m cash. On her subsequent death, their only son, who is running the business, will face a tax bill of nearly £300,000 on the £1m cash (the shares pass tax-free).

To avoid this, the will of the late husband is varied to leave the shares to his son. After a decent interval, his mother buys the shares back with her £1m cash. The son makes no capital gain on the sale, "because he is treated as having acquired them at their full £1m value". On her death, the shares pass to her son tax-free, and her estate value is nil. A neat way to avoid IHT, "if you know how".