Consider two families whose total estate comprises a home worth exactly £570,000.
Example 1
Mr and Mrs Foolish take no Inheritance Tax mitigation measures:
Mr Foolish dies first leaving his half of the house to his wife. This is a free transfer for Inheritance Tax purposes. Mrs Foolish dies second leaving a house worth £570,000 to her children.
The estate is £570,000
Deduct nil rate band* £285,000
________
Balance £285,000
Tax due at 40% is £114,000
The children have to sell the house to raise the tax due.
Example 2
Mr and Mrs Prudent undertake nil rate band Discretionary Will Trusts.
Mr Prudent dies first leaving £285,000 worth of his share of the home (all of it in fact) to a Trust. This is a free transfer. Mrs Prudent continues to occupy the home due to her Tenancy in common. Mrs Prudent then dies leaving her estate to her children.
The estate is £285,000
Deduct nil rate band* £285,000
________
Balance 000,000
Tax due at 40% is £0.
The children also receive £285,000 from their father's Trust fund (which they are deemed to have owned all along) free of Inheritance Tax. The children inherit the whole house free of tax.
*as provided in 2006 Budget and subject to change in future budgets.