Inheritance Tax Planning Issues

15th August 2017


According to HM Treasury 3.1% of estates are currently within the charge to Inheritance Iax (IHT). However, some commentators believe that 25% of the UK’s adult population have a potential liability to IHT and this will more than likely continue to increase. Given the strong growth in house prices throughout most of the country over the last ten to twenty years combined with the markedly slower increase in the IHT nil rate band more people than ever are unwittingly facing an IHT time bomb. For the 2015/16 tax year HM Revenue & Customs received a total of approximately £4.7 billion from IHT.

When should I plan for IHT? 
IHT planning should be undertaken now! Currently individuals suffer IHT on any wealth in excess of £325,000 so if you own your own house and have savings, life assurance policies or business assets you may potentially face a large IHT bill on any wealth over the threshold. It is important that IHT planning is undertaken as early as possible as a number of key planning strategies require time to be effective. This is particularly important where lifetime IHT planning is concerned as any gifts for IHT purposes only become completely exempt from IHT if you survive seven years from the date of the gift.

How does IHT work? 
IHT is chargeable on death on the value of your personal wealth taking into account any lifetime gifts made within seven years of your death. IHT is chargeable at 40% on the value of your estate at death less the £325,000 exemption. Any lifetime gifts made during the last seven years prior to death are taxed at 40% less taper relief depending on how long before death the gift was made.

Residence Nil Rate Band
Over the next three years a new IHT nil rate band is being phased in for those who have value in their estate that relates to the value of their main residence.  The additional nil rate band is being phased in and commences in 2017/18 at £100,000 rising to £175,000 in 2020/21.  The effect of this new nil rate band is that in some cases it will be possible to leave up to £500,000 of value to the next generation without any charge to IHT.  This new nil rate band is only available in full to those with a total estate of less than £2,000,000 as it is tapered away by £1 for every £2 of value above this threshold that is held in that individual’s estate at death.

What do I need to think about? 
The key things to consider when evaluating your IHT position will be:-

  1. The value of your personal assets both now and in the future.
  2. Your present and future financial needs.
  3. Your family’s future financial needs.

Your financial needs 
It is important that you consider your financial needs both now and in the future. As IHT Planning may involve gifting part of your current wealth to your children it makes sense to ensure that both you and your spouse are provided for, especially in retirement.

Your family’s financial needs 
As part of IHT planning you would need to consider the requirements of your family in the future and importantly how much control you wish them to have over any assets that you gift to them. It is also important to consider the needs of your spouse if you were to die first and to this extent adequate provision would have to be made in your will. When considering the value of your estate it is also important to consider the intentions of your parent or any other elderly relatives as they may wish to leave assets to you in their will.

What if I have valuable business assets? 
Generally if you run a business and you have full control of the business then any associated assets will attract business property relief at 100%. This will mean that on death the full value of the assets will be exempt from Inheritance Tax. Similarly, any assets used by a company over which you have control or by a partnership in which you are a partner will attract business property relief at 50%. There are similar provisions for agricultural property.

What can be done to reduce my exposure to IHT?

    1. The transfer of assets between spouses and civil partners benefit from an IHT exemption but whilst this is a useful exemption there are other reliefs which are more valuable. On first death, any unused nil rate band will be available for the surviving spouse to set against their estate on death. This means that leaving assets to your spouse will not be as potentially problematic as it may have been in the past. Not only will the percentage of unused nil rate band on first death will be available to the death of the second spouse, but they will also benefit from any growth in the nil rate band in the time between first and second death as the percentage is applied to the nil rate band as it stands at second death. For example, if you have only used 50% of your nil rate band on death then the remaining 50% will pass to your surviving spouse.  On their death, assuming the nil rate band is now £350,000 for example. their available nil rate band will be 150% times £350,000, i.e. £525,000.Similar to the nil rate band, the residence nil rate band (RNRB) will also be transferable on first death if it is unused so on second death the total estate potentially free of IHT could be £1,000,000.


    1. The key issue when considering where to leave your assets on death is the potential growth in value. If, on first death, the total joint estate is valued at less than twice the nil rate band at that time, then any assets which grow in value more quickly than the nil rate band will potentially lead to an IHT liability in future. It is sensible to consider this when drafting a will and decide whether it would be better for such assets to pass to the next generation on your death.


    1. Gifts made during your lifetime are potentially exempt from IHT and there is no limit on the number or value of transfers that can be made during your lifetime. This is therefore an extremely valuable relief if you have assets within your estate that you do not require to keep in your estate during your lifetime.


    1. If you do not wish to gift assets but do not wish control of assets to be passed over to the donees you can use a trust. In this case trustees would retain a degree of control over both the capital and income. The benefit of this route is that you can be a trustee and continue to have a degree of control over the asset but the asset will no longer be part of your estate. However it is possible that this route will involve some level of inheritance tax being payable but this depends on the type of trust used and the length of time that the assets are to remain within the trust.


    1. If you have any life assurance policies you should ensure that they are assigned during your lifetime so that on death the policies do not form part of your estate.


We hope that you have found this guide useful. If you would like some further advice or assistance please contact us.