A reminder of some of the basic IHT planning points

With the nil rate band frozen at £325,000, are you taking advantage of the inheritance tax planning options available to you?

Historically, it was common for the inheritance tax (IHT) nil rate band to increase on an annual basis. However, since 2009/10 it has been capped at £325,000 and will remain at this level until 2029/30. Further, HMRC’s latest IHT statistics have shown that receipts have been increasing so this it is important to check with you planner to see which options you may wish, or be able, to take advantage of.

Use IHT exemptions

The starting point for anyone who is wishing to carry out IHT planning is to use their exemptions – the most common ones being:

• Annual exemption – each individual can give away £3,000 each year, and use the previous year’s exemption if not already used
• Small gifts exemption – up to £250 can be given to any number of individuals (note this exemption cannot be combined with any other exemption in favour of the same person)
• Normal expenditure out of income – gifts can be made out of surplus income provided the gift does not affect the donor’s usual standard of living

Planning in this area is crucial to ensure you are using these exemptions to the full potential as, over time, regular use of these exemptions can result in significant IHT savings. Take the example of someone who has made use of their annual exemption over say 15 years – £45,000 would have been gifted free of IHT, saving £18,000 in tax! 

Lifetime planning

In some cases, it may be possible for you to make other lifetime gifts, whether outright to another individual or by executing a trust.

The current regime for outright gifts (including gifts to bare trusts) is favourable, thereby providing scope for lifetime planning. Outright gifts are ‘potentially exempt transfers’ (PETs) for IHT, meaning that no lifetime tax is payable on the gifted amount, or on any increase in value if the donor survives for the required seven-year period. Also, there is no limitation on such gifts or on the amounts which can be gifted. So provided the donor is in reasonable health and is happy to make such gifts, substantial IHT savings can be made.                

In cases where an outright gift is not a suitable option, a trust (other than a bare trust) can be used. Today, most forms of trusts, where you wish to maintain control of the assets, are taxed as relevant property trusts and so are subject to the discretionary trust tax regime. Because the trust fund does not vest in anyone’s estate for IHT purposes, associated IHT charges apply on creation, when capital is appointed out of trust and on each ten-year anniversary. These are more commonly known as an entry, exit and periodic charge. And in some cases, reporting obligations may also need to be fulfilled.

There are also a number of other types of trust widely available for IHT planning purposes, which can be used where you can retain access if you require, for example a gift and loan trust, a loan trust and a discounted gift and income trust. Advice should be sought to determine which (if any) of these options are likely to be suitable. 

Deeds of variation

Where assets are inherited, whether under a will or under the intestacy rules, it is possible to redirect the inheritance to achieve an immediate IHT saving by using a deed of variation.

Ordinarily, the inherited assets will accumulate in the taxable estate of the receiving beneficiary who may not want or need the inheritance. Instead of choosing to make a gift of the inheritance (which would either be treated as a PET or a chargeable lifetime transfer), it is possible for someone to take advantage of the deed of variation option and achieve an immediate IHT saving on their own estate.

To achieve the desired outcome, the variation must:

• be in writing,
• contain a statement that the relevant legislation (s142 IHTA 1984) is intended to apply,
• be made within two years of death by the person(s) who would have benefitted from the original gift, and
• the property must have been included in the deceased’s estate at the date of death.

In practice, there is no requirement to vary the entire amount of the inheritance enabling you to choose to vary only part of it. It is possible to vary an amount directly to an individual or to a trust. The option chosen will of course depend on your specific circumstances taking account of factors such as whether you are wealthy in your own right, whether you are likely to want to retain control and whether you may wish to benefit in future should the need arise.

A variation into a discretionary trust enables you to retain access by being named as a beneficiary. You can also maintain control by acting as one of the trustees. This is a viable planning option which does not fall foul of the gift with reservation provisions or pre-owned assets tax – the variation is effectively treated as having been made by the deceased for IHT purposes provided the necessary conditions are satisfied.

Note, in cases where the variation is into trust and you are included as a beneficiary, you will be taxable on any income arising within the trust under the settlor-interested trust provisions.

This article provides a general overview of some of the IHT planning options available. Of course, in practice, your own objectives and circumstances will be borne in mind, forming the basis of any advice we provide.

If you would like to discuss IHT planning for you and your family, please contact us here.

Articles on this website are offered only for general information and educational purposes. They are not offered as, and do not constitute, financial advice. You should not act or rely on any information contained in this website without first seeking advice from a professional.

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Sources: Techlink

Date written: 9^th January 2024

Approved by Evolution Wealth Network Ltd on 09/01/2025.