Estate Planning and Inheritance Tax (IHT)

Inheritance Tax is usually paid on an estate when someone dies. When they die, all their assets, including gifts and trusts over the last 7 years, are totalled up. If the total is over a certain tax threshold, called the Nil Rate Band (NRB), then IHT will be paid at 40% on the excess over the NRB. The Nil Rate Band for 2015 / 2016 is £325,000 per person, however, a husband or wife (or civil partner) will inherit their partner’s NRB should they die first, giving the surviving spouse or partner an NRB of £650,000 (assuming they have not previously used any portion of their NRB).

It is the job of the executor or the personal representative of the deceased person to administer their estate and pay any inheritance tax due within 6 months of death.

The number of people who have estates that will be liable for some amount of IHT is growing, mostly due to the rise in house prices in the last 20 years. It is also important to consider what your estate may be valued at in 20 or 30 years also, as it is a fair bet at the moment that the Nil Rate Band will not necessarily increase so rapidly, making more estates liable to IHT in the future.

However, there are strategies that can be used to mitigate for potential IHT, which will allow you to pass on more of your wealth when you die. Here are a few.

Life Assurance Policy Written in Trust: this is the most simple method to mitigate for potential IHT. The amount of IHT that would be paid is calculated and a policy for that amount is taken out, to be paid on death. The money would be paid into a trust so would not be counted as part of the estate for IHT purposes.

Gifting: this is another straight forward method of reducing an estate size and is known as a Potentially Exempt Transfer (PET). A person may “give away” whatever assets they wish, to whoever they wish. If they survive for 7 years then all the gifts are free from IHT. If they do not, then IHT will be applicable and the gifts will be counted as part of the estate (there may be some reduction in the IHT on the gift, depending on how long they lived after the gift was made). The important thing here is that when a gift is made the person making the gift gives up all rights to, benefits from and access to the gift. If they do not, then IHT will again be applicable.

Outwith the 7 year rule, you are allowed to “gift” £3000 every year, or £6000 if you did not use the previous years allowance.

Trusts: transferring assets into a trust is a well recognised and much used method of removing assets from an estate. There are many different forms of trust and each has its own regulations regarding taxation and form. It is therefore essential that you consult an independent financial adviser or a lawyer when setting up a trust, to ensure you get the correct trust formation that meets your needs. The basics of all trusts are generally quite similar. A trust is a legal entity so when you transfer assets into it you give up all rights to those assets, then if you survive for 7 years after the transfer is made the assets are exempt from IHT. If you are using a Discretionary Trust, the IHT exemption will only apply to assets up to the value of the NRB.

You will find a lot more information on trusts and their uses on this government website:

http://webarchive.nationalarchives.gov.uk/+/http://www.hmrc.gov.uk/trusts/introduction.html

IHT Exempt Investment:
 investment in Enterprise Investment Scheme (EIS) registered companies or funds will be free of IHT after 2 years. These companies and funds are made up of small and medium sized companies which are not quoted on any exchange and are therefore considered higher risk investments.

There are numerous other tax advantages to investing in EIS companies, such as 30% income tax credit on the amount invested, which can be backdated to the previous year, and no Capital Gains Tax (CGT) when the shares are sold, but it is essential the investor understands exactly what they are investing in and the risks involved. It is vital that anyone considering this form of investment consults an IFA before doing so.

We strongly advise you to consult Personal Money Management directly if this type of investment is of interest. More information on EIS investment can be found at Her Majesty’s Revenue and Customs website here:

Click here for more inforamtion on EIS investment

As can be seen, there are numerous methods of planning your estate handover that will permit you to mitigate or account for potential IHT liabilities. Often, people will use a combination of strategies, giving them various degrees of control over the assets, depending on their risk profiles and circumstances. Again, the key to comprehensive, sensible and effective estate planning is consultation with professionals who have relevant experience, which is what you will find at Personal Money Management.

Whether you are considering any of these strategies or not and regardless of the size of your estate, it is also essential that you make a detailed Will. It is also advisable to consider making a Power of Attorney (POA) at the same time, in the event you become incapacitated and are unable to run your affairs.

More information on Wills and POAs can be found on the Personal Money Management website or

Click here to view more information on Wills and POAs

The Financial Conduct Authority does not regulate Estate and Inheritance Tax Planning.

Want to know more?

Call us for a friendly chat on 0131 538 7390 or email: dvh@personalmm.co.uk