Inheritance Tax Planning

Inheritance Tax Planning


Dawn Moir, Head of Wills, Trusts & Probate Department of Goughs Solicitors, Wiltshire ( explains Inheritance tax planning



Inheritance Tax is payable on your assets when you die, but brings within its scope certain lifetime gifts. There are a number of ways it can be reduced or avoided entirely. This article provides you with some basic information in order to help you assess whether further inheritance tax planning advice and measures would be of benefit to you.


Lifetime Gifts

Certain lifetime gifts attract exemptions from inheritance tax:

  • Gifts between a husband and wife or civil partners (UK residents) - No limit
  • Gifts to charity (UK) - No limit
  • Annual exemption each tax year per donor -  £3,000
  • Small gifts to any number of persons - £250
  • Wedding gifts by parents - £5,000
  • remote ancestor -  £2,500
  • party to marriage - £2,500
  • others -   £1,000
  • Gifts which are normal expenditure out of income - No limit

During a person’s lifetime most gifts regardless of their size, which are not exempt under the above provisions, are not subject to an immediate charge to inheritance tax but are potentially exempt transfers (PETs). If the donor dies within seven years of making the gift, inheritance tax may become payable on PETs. The charge is on the value of the gift at the date the gift was made and is taxed at the rates applicable when the donor dies. The tax is paid by the donee.

Tapering relief may reduce the inheritance tax liability if the donor survives for more than three years but less than seven. The reduction is on the rate of tax and not the amount subject to tax and therefore only applies if the value of the gift exceeds the nil rate band on the donor’s death, and a liability to tax
Years between gift & death                  % of full charge at death rate
 0 – 3                                                                              100
 3 – 4                                                                               80
 4 – 5                                                                               60
 5 – 6                                                                               40
 6 – 7                                                                               20

Care should be taken before making any gift as although inheritance tax may be avoided by making a lifetime gifts and surviving seven years an immediate liability to capital gains tax may arise instead.


Gifts on Death


(a) Assets transferred between a husband and wife on death are exempt for inheritance tax purposes provided they are both live in the UK. If the surviving spouse is not a UK resident the Spouse Exemption is capped at £55,000.

(b) Assets left to charities on death are exempt.

(c) Everyone has a nil rate band (currently £325,000) to give away where the inheritance tax charge on assets within this band is 0%. The nil rate band is offset against any lifetime gifts (PETs) made within the seven years before death first and if there is any balance left over it is offset against assets at the date of death.

From October 2007, where an individual dies and their spouse has died before them and not utilised all or part of their nil rate band, the percentage of the nil rate band unused on the estate of the first spouse to die can be transferred to the estate of the second spouse to die.


Let us use Mr & Mrs White as an example:

Mr White: £400,000 (House, cash & investment)
Mrs White: £400,000 (House, cash & investment)


Mr White dies first, leaving everything to his wife. There is no tax on his death because gifts between spouses are exempt:

Mr White’s assets: £400,000 (left under his will to Mrs White)
Mrs White’s assets: £400,000
Total: £800,000


Mrs White then dies leaving everything to the children:

Total Estate: £800,000
Less nil rate band for Mrs White: £325,000
Less nil rate band transferred from Mr White’s estate: £325,000
= £150,000
Tax @ 40%: £60,000


The benefit of the transferable spouse allowance is that whilst it is the percentage of the deceased spouse’s unused allowance which is transferred, it is calculated at the current nil rate band rate, not the rate applicable when the spouse first died.


(d) To maximise the tax efficiency of your estate, you need to have sufficient assets belonging to each spouse which can be passed down. It may be beneficial to change the ownership of assets, but it is very important that this does not have tax or financial implications during your lifetime.

(e) Your Will needs to be tailored to your individual circumstances. Greater tax savings may be achieved where there are special types of assets, such as business or agricultural property. Some lifetime planning measures may also be recommended.

(f) If a Will has not been prepared in order to mitigate inheritance tax planning, the beneficiaries have the ability within two years after a person’s death to change the way the assets are dealt with. This is by a Deed of Variation. However, this scheme is subject to threat and should not be relied upon as an alternative to having a valid Will in place.

(g) Death benefits under personal pension plans or insurance policies may be subject to inheritance tax. Tax protection can be achieved by putting the polices into trust. Similarly, death benefits under an employer’s scheme can, in some cases, be subject to inheritance tax and a valid and up to datenomination should be put in place.

(h) Insurance policies can be taken out specifically to provide funds to pay inheritance tax. Such policies should be put in trust



Further Information and Disclaimer

The above information applies for the tax year 2010/2011. Any changes to inheritance tax which the Government may introduce need to be reviewed carefully and may affect the rules and proposals summarised above. For the most up-to-date information and advice tailored to your personal circumstances call our Wills, Trusts and Probate Team who will be more than happy to assist.

Goughs Solicitors
2 Fore Street
BA14 8HX

Tel: 01225-762683

Disclaimer: The author accepts no responsibility for actions taken as a result of the above article. When considering legal proceedings legal advice should be sought.