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  • Michael Roberts

Inheritance Tax Planning - Start with the Basics

Asset values and in particular property prices have risen sharply in recent decades. As a result more and more people are caught by Inheritance Tax, also known as IHT. It is often said that IHT is a "voluntary tax" as it can be easy to avoid. With a potential tax rate of 40% on death, there is plenty of motivation to take action to save IHT.

Many complicated schemes exist to help people reduce their IHT liability, however it is important to consider taking advantage of the generous reliefs and exemptions first; for many people this will be enough to solve the problem. In this article I shall take a look at a few simple strategies that can be put in place to make use of these easements.

Nil Rate Band

Everyone who is UK domiciled has a "Nil Rate Band" (also known as NRB). This is an amount which a person can leave on death with IHT being charged at a nil rate, hence Nil Rate Band. The current level of the Nil Rate Band is £325,000.

Transferrable Nil Rate Band

In the past, unless an individual used their Nil Rate Band upon death, it was lost. This often used to be the case where, for example, a husband died and left all his assets to his surviving spouse. As transfers to spouses are exempt from IHT, this effectively wasted the NRB of the first person to die.

Several years ago the concept of "transferrable Nil Rate Bands" was introduced. This was a significant development which means that in the example above where a person’s assets are left to their surviving spouse upon death, the unused proportion of their NRB is also transferred to their spouse.


David and Martha are married. They have a total estate worth £650,000 which is divided equally between them.

When David dies, he leaves all his assets to Martha. As David and Martha are married this is an exempt transfer, because there is no IHT chargeable between UK domiciled spouses. As David has not left any gifts to anyone else on death, he has not used any of his Nil Rate Band. Upon Martha’s death later that year, her personal representatives can make a claim to use David’s Nil Rate Band. As a result, Martha has 2 Nil Rate Bands available, or 2 x £325,000 = £650,000. As this covers the total value of their estate, no Inheritance Tax is payable.

It is important to note that the transferrable NRB must be claimed when the surviving spouse dies; it is not automatically available. It is important to keep certain documentation following the administration of the first estate to enable a successful claim to be made.

Residence Nil Rate Band

A new allowance known as the Resident Nil Rate Band will be introduced on 6th April 2017. Initially giving an additional £100,000 allowance where an individual leaves their main residence to a direct descendant, the allowance is due to be increased to £175,000 over the next 3 years. Ultimately, this will mean a couple can pass on £1m of assets free of Inheritance Tax. However, the new allowance is highly complicated and there are a number of pitfalls to watch out for. Look out for my forthcoming article focussing on the Resident Nil Rate Band.

Exempt Gifts

Certain gifts can be made during the lifetime of an individual which are exempt from IHT. The main types are described below.

Inter-spousal Gifts

As mentioned above, gifts made to a UK domiciled spouse are exempt from IHT, whether the gift is made during lifetime or upon death.

Small Gifts

An individual is entitled to give up to £250 to another individual free from Inheritance Tax implications. The donor may give as many of these gifts as they like in any one tax year, however they can only give one such gift per person, and it may not form part of a larger gift.

Annual Exemption

Each tax year an individual is permitted to make a larger gift of up to £3,000 without IHT implications. The gift could be to another individual or to a trust, for example. The Annual Exemption may be carried forward for up to one year, therefore if an individual did not use this allowance last year, they may make a gift of up to £6,000 this year without IHT implications.

Gifts upon the Occasion of Marriage

As the name suggests, it is permitted to make a gift upon marriage or formation of a Civil Partnership. There are limits though, for example:

  • Parents can each give cash or gifts of up to £5,000

  • Grandparents and Great Grandparents can each give up to £2,500

  • Anyone else can give up to £1,000

Payments or Gifts from Normal Expenditure

An individual is permitted to make regular payments or gifts from income without IHT implications. This can be an extremely useful planning tool, however there are a number of rules to consider, for example:

  • The payments must be made from after-tax income

  • The payments must not be made from capital

  • The individual must have sufficient income after making the gifts to maintain their lifestyle

  • There should normally be a regular pattern of these gifts

These payments could include, for example, a regular gift to another individual, regular gifts for Christmas or birthdays, regular premiums on a life insurance policy.

Charitable Gifts

It is possible for an individual to make gifts to certain organisations free from Inheritance Tax implications. These organisations include, for example:

A qualifying charity established in the EU or another permitted country

Some institutions, for example the National Trust

Certain political parties

Making a charitable gift through your will can also reduce the rate of tax that applies to your taxable estate to 36%, providing you meet certain qualifting criteria.

Chargeable Lifetime Transfers

Gifts into certain types of trust are classified as Chargeable Lifetime Transfers and, as the name suggests, can be subject to an immediate charge to Inheritance Tax. Although not all such transfers will actually be chargeable, this is a highly complex area where the specific circumstances must be taken into account to determine whether IHT is due.

Potentially Exempt Transfers

If a gift is made that does not qualify as an exempt gift, and it is not a Chargeable Lifetime Transfer either, then it is likely to be a Potentially Exempt Transfer (also known as a PET).

For example, Andrew gives his Son Stuart £30,000 as a deposit on his first home. Andrew has told Stuart that the money is his to keep; he doesn’t need to repay it. As this gift does not fall into any of the exemptions described above, and because Andrew has already used his available Annual Exemptions, this gift to Stuart is a PET.

Providing Andrew survives 7 years or more, no Inheritance Tax will arise on this gift. However, Stuart should be careful because he may be liable to pay IHT if Andrew dies within 7 years of making the gift. Again, calculating whether any IHT is due is a complex issue and requires further investigation.

It is not necessary to report PETs to HM Revenue and Customs, but it is very important to keep proper records of such transactions.

In the event of death of the donor within 7 years a calculation will be carried out to determine whether any IHT is due on the gift. If IHT is due, Taper Relief can be applied to reduce the amount of tax to be paid if the donor died more than 3 years after the gift was made.

It is important that the donor ceases to have any enjoyment of the assets that were gifted in order to avoid the gift being classed as a gift with reservation of benefit, with the gifted asset then being treated as remaining within the donor’s estate for IHT purposes.

Exempt Assets

Certain types of assets qualify for advantageous treatment for Inheritance Tax purposes. One such example of this is business assets which qualify for Business Relief (BR).

Business Relief is an extremely useful planning tool for Inheritance Tax, especially for, but not limited to, business owners. In essence, BR allows an individual to pass on certain business assets free of IHT either during the donor’s lifetime or upon death.

The following are examples of assets which may qualify for Business Relief:

  • A business, or an interest within a business

  • Unlisted shares, including those listed on AIM, the Alternative Investment Market

  • A controlling shareholding in a company listed on a recognised exchange

  • Land, buildings, plant and machinery used wholly or mainly within the donor’s business in the last 2 years

There are, however, a number of exclusions from this relief including companies which deal mainly in securities, stock, land or buildings or making or holding investments. It is important to seek professional advice if you intend relying on this easement.

Disposal of BR-Qualifying Assets

When considering their Inheritance Tax position, an individual should be careful to take into account possible disposals of assets which currently qualify for Business Relief.

For example, John owns a very successful mail order company. His assets are made up of a house worth £300,000, plus the business which is valued at over £1m. His IHT position was reviewed recently and he was advised that his estate would not be subject to IHT because his personal assets are within the Nil Rate Band (as described earlier in this article), whilst his business assets are exempt from IHT because they qualify for Business Relief.

Soon after, John becomes ill and decides to sell his business and retire. After paying Capital Gains Tax on the sale of his business, he received a cash lump sum of £1m. A year later, he dies. At the time of death, his estate was subject to a significant IHT bill. This is because he sold the business (which had been exempt from IHT whilst he owned it), and received a large amount of cash in return which no longer qualified for BR. As his Nil Rate Band was already used up by his house, the entire sale proceeds he received from the sale of his business would now be subject to IHT at 40%. With some careful planning, the Business Relief could have been retained, saving £400,000 in Inheritance Tax.


As we have seen, IHT is no longer a concern only for the super rich; nowadays, ownership of even a fairly modest property and some rainy-day money could result in an individual being subject to Inheritance Tax; especially in some of the more affluent areas of the country.

As mentioned previously, there are numerous complex schemes available which could successfully remove liability to Inheritance Tax. However, even just some basic planning using the reliefs and allowances described above can significantly reduce or eliminate an IHT problem.

The solution begins with understanding the extent of any IHT that would be payable in the event of death. From there, an effective strategy can be designed to reduce the amount of IHT payable.

If you would like to discuss your own situation, please contact us. We should be pleased to calculate your current IHT liability and recommend steps you can take to improve the situation.

We recommend that you seek advice on how the reliefs and exemptions above apply in your own personal circumstances before taking action.

Important Note

This article is intended for information purposes only and should not be considered to be a recommendation. This article is based on our understanding of current and draft pension and tax rules as at the date of this article. Please note that tax and pension rules are subject to change; if you are at all uncertain about the suitability of any option for your circumstances we strongly suggest you seek regulated personal financial advice. You should not take action solely on the basis of this article without seeking advice specific to your circumstances. Please get in touch to find out more. · T: 01635 555650 · E:

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