Tax Planning

Inheritance Tax
Planning

Inheritance Tax (IHT)

In this section we will provide information on what Inheritance Tax Planning is and guidance on Inheritance Tax Planning.

Inheritance Tax (IHT) is a tax on the estate of someone who has died, 
including all property, possessions and money.

There is normally no tax to be paid if:

  • The value of your estate is below the Nil Rate Band (NRB) of £325,000, or
  • You leave everything above the threshold to your spouse or civil partner, or
  • You leave everything above the threshold to an exempt beneficiary such as a charity
If the value of your estate is above the NRB, then the part of your estate above the threshold might be liable for tax at the rate of 40%.
So, if your estate is worth £525,000 and your IHT threshold is £325,000, the tax charged will be on £200,000 (£525,000 - £325,000). The tax would be £80,000 (40% of £200,000).

The NRB is fixed at £325,000 until 2021, but your NRB might be increased if you’re widowed or a surviving civil partner. Couples can transfer any unused NRB when the first person died to the survivor.

This can double the amount of NRB available up to £650.000. This extra transferable element is known as Transferable Nil Rate Band (TNRB).

How much is the annual 'gift allowance'?

While you're alive, you have a £3,000 'gift allowance' a year. This is known as your annual exemption. This means you can give away assets or cash up to a total of £3,000 in a tax year without it being added to the value of your estate for Inheritance Tax (IHT) purposes.


If you haven’t gifted the £3,000 in the previous tax year you can also gift this so the total would be £6,000.

What happens if I gift more than the £3,000 (£6,000) who is liable for the inheritance tax?

Usually it is the estate which is liable for IHT. However if you are the recipient of a gift, and the giver has died within 7 years, and has already given away more than £325,000, you could be liable to pay IHT yourself. Anyone can give away up to £3,000 a year, and pay no tax. This is known as the annual exemption.

The Residence Nil Rate Band (RNRB)

Also known as the home allowance - has been introduced recently.


The RNRB is on top of the NRB and the TNRB. To be eligible you must pass your home or a share of it to your children or grandchildren. This includes step-children, adopted children, foster children but not nieces, nephews or siblings.


There is tapered withdrawal of the home allowance if the overall value of your estate exceeds £2 million.


What does 'tapering' mean? The residence nil-rate band will be subject to a tapered withdrawal of 50% if your estate is worth more than £2 million. In other words, you will lose £1 of the additional threshold for every £2 of your estate that exceeds £2 million.


Provided certain conditions are met, the home allowance gives you an additional allowance to be used to reduce any IHT liability against your home.

The RNRB allowance is £175,000 from tax year 2020/21 and in line with the Consumer Price Index thereafter.


You may also be able to use any unused RNRB from your spouse or civil partner’s estate if you’re widowed or a surviving civil partner. This can double the amount of RNRB available.

A trust is a "legal entity created by a party (the trustor) through which a second party (the trustee) holds the right to manage the trustor's assets or property for the benefit of a third party (the beneficiary)." Basically, a trust is a financial arrangement between three parties that hold assets for a beneficiary.


There are many different kinds of trusts, but the general idea is a three-party ownership system wherein one party gives another party the rights to hold property or assets for yet another party (who benefits from the arrangement).

A Discounted Gift Trust (DGT)

A discounted gift trust (DGT) is a trust-based inheritance tax (IHT) planning arrangement for those individuals who wish to undertake IHT planning but who are unable to lose full access to their investment. In a DGT access is typically provided by means of a series of preset capital payments to the investor who will be the settlor of the trust.

Business Property Relief Investments (BPR)

Business Property Relief (BPR) has been an established part of inheritance tax legislation since 1976. And as an investment incentive, it’s relatively straightforward. Once BPR-qualifying shares have been owned for at least two years, they can be passed on free from inheritance tax on the death of the shareholder.


BPR is a well-established relief dating back 40 years, however, you should keep in mind that the value of an investment may go down as well as up and you may not get back what you originally put in.

Estate and Inheritance Tax Examples

Case Study 1

Mr and Mrs Smith are a Married Couple – House value of £500,000 and Savings and Investments of £200,000, total estate value of £700,000.

Mr and Mrs Smith have two children who are equal beneficiaries of their estate, a the house will pass to the children both Mr and Mrs Smith will receive the Residential Nil rate Band allowance of £175,000 each (total of £350,000).

Mr and Mrs Smith will also have Nil Rate Band Allowances of £325,000 each (total of £650,000). This means that Mr and Mrs Smith will have inheritance tax allowances of £1,000,000 and therefore no inheritance tax is payable.

Case Study 2

Mr and Mrs Davis are a Married Couple – House value of £800,000 and Savings and Investments of £500,000, total estate value of £1,300,000.

Mr and Mrs Davis three children and six grandchildren and have split estate 60% to their children and 40% to their grandchildren.

As the house will pass to the children and grandchildren both Mr and Mrs Davis will receive the Residential Nil rate Band allowance of £175,000 each (total of £350,000).

Mr and Mrs Davis will also have Nil Rate Band Allowances of £325,000 each (total of £650,000). This means that Mr and Mrs Smith will have inheritance tax allowances of £1,000,000.

This means inheritance tax is payable on the amount above the £1,000,000 of £300,000 is liable to inheritance tax at 40%, which would result in is payable of £120,000.

Inheritance tax planning advice and tax planning advice would focus on how to reduce/remove the inheritance tax liability of £300,000 and save the £120,000 inheritance tax.

Advice would consider an investment(s) within a trust or investment into a Business Property Relief Investment, both of these would take into account the suitability.

Case Study 3

Dr and Mrs Patel Married Couple – House value of £1,500,000 and Savings and Investments of £800,000, total estate value of £2,300,000.

Dr and Mrs Patel have two children and four grandchildren and have split estate 80% to their children and 20% to their grandchildren.

As the house will pass to the children and grandchildren both Mr and Mrs Davis will receive the Residential Nil rate Band allowance of £175,000 each (total of £350,000).

However, as the estate is in excess of £2,000,000, tapering will be applied to the Residential Nil rate Band, the amount above the £2,000,000 of in other words, you will lose £1 of the additional threshold for every £2 of your estate that exceeds £2 million, this is £150,000.

Dr and Mrs Patel will have Nil Rate Band Allowances of £325,000 each (total of £650,000) and £200,000 of Nil Rate Band Property Allowances, total of £850,000.

This means inheritance tax is payable on the amount above the £850,000 of £1,450,000 is liable to inheritance tax at 40%, which would result in is payable of £580,000.

Inheritance tax planning advice and tax planning advice would focus on how to reduce/remove the inheritance tax liability, for example:-
  • If £300,000 was placed into a Trust (this falls outside of the estate after seven years), this would reduce the inheritance taxable estate to £2,000,000.
  • The inheritance tax on the £2,000,000 is less the inheritance tax nil rate band allowances of £650,000 and the two full Nil Rate Band Property allowances of £350,000.
  • This leaves a £1,000,000 liable to inheritance tax at 40% which is £400,000 and a saving of £180,000 before the planning.
Advice would consider an investment(s) within a trust to be suitable for the clients and the most appropriate trust.

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