FAQs - IHT planning
On death, how much of my estate will be chargeable to inheritance tax?
Excluding any reliefs which may be available for business property or agricultural property, for the 2008/09 tax year, no inheritance tax is payable on the first £312,000 of your estate. Inheritance tax at the rate of 40% is payable on the value of your estate in excess of this amount.
What is a Potentially Exempt Transfer (PET)?
This is the term used to describe gifts made during an individual’s lifetime. Such gifts can be of any amount and provided the individual making the gift survives for a period of seven years or more, the value of the cash/assets gifted will fall outside of that individual’s estate for Inheritance tax purposes on death.
If death occurs within seven years of making the gift, then the asset is taken into account in determining the value of the estate but at reduced rate. The value is tapered depending on how many years have elapsed. For example there is no reduction if death occurs within three years of making the gift. However if death occurs within five years the value of the asset is reduced by 60 % for inheritance tax purposes.
Is IHT only applicable on death?
There are certain circumstances which can give rise to an inheritance tax during one's lifetime. If an individual makes a gift in excess of the Nil rate band (currently £312,000) or settles assets into trust (again in excess of the Nil rate band) then a tax charge can arise. This is charged at lifetime rates of 20%.
How can I reduce my IHT liability?
Make gifts
Certain gifts will fall out of an estate immediately, while others will remain chargeable for up to seven years. The main exemptions are summarised in Figure 1 below.
Keep life insurance proceeds out of the estate
Life insurance policies should always be held in trust so that death benefits fall outside the estate and can be accessed without probate.
Review wills
All adults should have a will, which should be reviewed regularly, particularly as children grow older. It should also be noted that marriage or divorce voids previous wills. Beneficiaries can change a will by mutual consent up to two years after death, which is a useful planning tool.
Include a nil-rate band discretionary trust in wills
A nil-rate band discretionary will trust allows spouses to settle assets up to the nil-rate band, giving the survivor access to the assets without them falling into their estate. This potentially saves £120,000 in IHT, although the trust must be carefully managed to secure the IHT saving.
Equity release
Elderly people may have considerable value tied up in their home and many are turning to equity release schemes as a way of unlocking funds which, in turn, can be gifted. There are two main types of equity release. The first is a lifetime mortgage, which is secured against the value of the home and can be released as a lump sum or regular income. The second is a reversion scheme, whereby a proportion of the property is sold to an investment company, but the seller can stay in the property rent- free as long as they wish. Such schemes need to be looked at carefully and may only be suitable in certain limited circumstances. But they can be useful planning tools.
Aim shares and portfolios
Shares listed on Aim are ‘unquoted’ for IHT purposes, which means that shares held in Aim trading companies are not liable to IHT once they have been held for two years. Life insurance is available to cover the interim two-year period. Aim portfolios that include a broad range of shares to reduce risk are becoming a popular way of tackling IHT.
Discounted gift schemes
Discounted gift schemes immediately reduce the value of an estate and further savings can be made if the individual survives for seven years. Such schemes can be used up to the age of 90.
Specific IHT-saving schemes
One IHT-saving scheme on the market effectively allows people to swap their home for units in a life insurance fund, which can be gifted while they remain in the property. These are quite flexible schemes, but expert advice is recommended.
Agricultural and business property
Assets, such as an office or working farm (including perhaps a farmhouse), may fall outside the IHT net once they have been owned for two years.
Works of art and heritage property
Pre-eminent works of art and heritage property may be exempt from IHT if members of the public are allowed to view them. Furthermore, some assets can be used to settle IHT liabilities.
Other gifts
Finally, gifts to registered charities can be made free of IHT and, interestingly, so can
gifts to political parties.
Fig 1: A summary of the main gifts exempt from IHT
| Gifts exempt from IHT | Value | IHT saving | Comments |
|---|---|---|---|
| Annual gift | £3,000 | £1,200 | An individual can give away £3,000 annually or £6,000 if no gift was made the previous year |
| Small gifts – an unlimited number | £250 to each donee | Saves £1.00 per gift | Unlimited gifts of £250 a year to different people, which must not form part of a larger gift |
| Wedding gifts (including civil partnerships) | £5,000 | £2,000 | From parent to child |
| £2,500 | £1,000 | To grandchildren or great- grandchildren | |
| £1,000 | £400 | To anyone else getting married | |
| Gifts to spouses (including civil partnerships) | Unlimited | 40% of gift | There is a limit of £55,000 on the IHT-free gift when that gift is from a domiciled to a non-domiciled spouse |
| Regular gifts from income | Unlimited | 40% of gift | Gifts must be from surplus income, be habitual or should be documented |
| Lifetime gifts to individuals (potentially exempt transfer) | Unlimited | 40% of gift after seven years | As the donor must survive for seven years after the gift is made, it is important to record the date of the gift. |
What is the transferable nil rate band?
For deaths on or after 9 October 2007, spouses and civil partners are now able to transfer their unused inheritance tax nil rate band.
Prior to 9 October 2007, it was still possible to ensure that spouses and civil partners utilised their nil rate bands by either equalising their estates or including a nil-rate band trust in their will.
