25 Aug 2011

Inheritance Tax Planning

Inheritance Tax Planning

Allan Gardner, Financial Services Director, provides some simple solutions to reducing an Inheritance Tax bill and protecting your wealth for your family.

Allan Gardner, Financial Services Director, provides some simple solutions to reducing an Inheritance Tax bill and protecting your wealth for your family.

Benjamin Franklin famously said, "In this world nothing is certain except death and taxes". Little did he know how pertinent those words would be some 300 years later. In the UK HMRC collected an estimated £3.3 billion pounds in Inheritance Tax during tax year 2010/11.....yet with careful planning inheritance tax can be avoided or at worst greatly reduced. 

Inheritance tax is levied on your entire estate on death including all savings, investments, property and personal effects at a rate of 40% on any amount over £325000 - the nil rate band frozen for tax years 2011 - 2015. The nil rate band is the term used to describe the value an estate can have before it is taxed. This banding is doubled to £650,000 for married couples. So the potential liability can be substantial given property values and other personal assets which qualify for taxation. 

Some simple solutions to reducing an Inheritance tax bill

Making a will

Making a will allows you to consider what your estate is worth and who you want to benefit from it on your death. The risk of not having a suitable will in place is that delays can occur in assets being passed to family members or that assets go to people you don’t want to benefit.

It also provides a good basis to understanding how much IHT planning is required as well as ensuring your beneficiaries receive what you want them to receive.


You can gift away assets or cash up to the value of £3000 per tax year without any tax liability. This can be backdated to sweep up the previous years allowance if not used thus doubling the allowance to £6000. There are other allowances that are permitted for special occassions such as weddings and 

civil partnerships and gifts from income which can increase your gifting annual allowance but the savings in inheritance tax are relatively small due to the low level of allowances. 

Potentially Exempt Transfers 

Gifting over an above your annual allowances can be done. These gifts can be anything from cash to property for any amount and can be tax free provided you do not pass away within 7 years. These gifts are called potentially exempt transfers. However you cannot give away an asset and still benefit from it i.e. your home, and then continue to live in it unless you pay the market rent. 

If you die during the seven years after gifting the assets would still be taxable, however the amount would vary and depend on how close you got to the seven year milestone before passing away. 


Placing assets into a trust in your lifetime can be a good way to reduce your IHT bill. Limited to the current nil rate band of £325,000, these gifts count as potentially exempt transfers and the seven year exemption rule applies. 

Care has to be taken as to how much is placed in trust at any one time and also as to which type of trust is best suited for the type of investment being undertaken or potentially an initial and periodic tax change could be applied.

Trusts are a key tool when looking to mitigate a possible IHT liability but the work around them can be complicated so professional and legal advice should be taken before embarking on this type of planning.Inheritance tax is often called the voluntary tax and there are many ways of reducing your liability. Often the biggest barrier to tackling this issue is inertia or not realising just now much HMRC are going to benefit by. 

Ideally, advice should be sought from a solicitor and an independent financial adviser working together to meet your goals and objectives. 

Time is the key element to Inheritance tax planning so the earlier the problem is tackled the easier it is to find the correct solution. So to finish with we return to Benjamin Franklin, “you may delay, but time will not”.

For more information on Inheritance Tax Planning, please contact Allan Gardner on 01224 337434 or agardner@acandco.com. 
The Financial Conduct Authority does not regulate tax advice, wills or trusts.

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