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Services Tax Private Client Inheritance Tax

Inheritance Tax

UK trust tax planning

Inheritance Tax (IHT) is undoubtedly a complex and sensitive issue. Dealing with a loss is traumatic enough, never mind the subsequent tax issues. We can guide and advise you through the sensitivity surrounding IHT, both with planning in your lifetime and for your beneficiaries on your death.



Life planning

Life planning

It is often said that “failing to plan is planning to fail”. Although there are differing opinions on  who first coined the phrase, it is accepted that IHT is one of those taxes where long term planning is key, if you want to minimise the tax due on your death, and certainly if you want your loved ones to avoid unexpected tax bills.

We work with you to ensure you understand your current IHT exposure on your death, and to discuss your wishes for passing your wealth to your beneficiaries, helping you to formulate a plan that maximises  available tax reliefs. We will work with your solicitor to ensure your Will reflects these plans. It is also important to keep any previously written Wills under regular review to ensure they are still current in light of any changes in tax legislation.

Inheritance Tax - lifetime transfer

Lifetime transfers

Most gifts are either wholly or partially exempt, or are only taxed if the donor does not survive seven years. Some gifts, such as to trusts or companies, are taxable when they are made. Making a return of such gifts is not part of the Self Assessment process, and the time limit for the return and payment of tax is normally six months after the gift is made. We will assist you with any reporting obligations, and calculations of tax liabilities.

Keeping a running seven-year total of gifts made is something we always recommend. Some gifts need more detailed record keeping to enable personal representatives to prove that reliefs can apply. We can maintain these records on your behalf, so they are available when required.

Inheritance tax on death

IHT on death

We work with clients and their solicitors to provide support in preparing the complex IHT Return that is required following a death. We will provide help and advice in relation to the reliefs that may be available and assist with valuations of shares and other assets.

We understand the areas where HMRC often raises enquiries – including valuations of property or shares, where business or agricultural reliefs are claimed, or where claims that the deceased was not long-term resident are made. We can lead negotiations with HMRC and guide you through complex questions that may arise.

Inheritance tax for trusts

IHT for Trusts

Trusts are subject to their own regime for IHT, although there are still some trusts in existence that follow older rules. Some IHT charges for trusts are transaction based but others occur on a regular cycle.

We help trustees anticipate these charges, reduce them where possible, and help them decide how best to fund them. We also deal with trust compliance reporting, see for details of our Trust services.

What is the amount of an estate that you do not have to pay IHT on?

This is known as the Nil Rate Band (NRB) and currently stands at £325,000. IHT may be due at the standard rate of 40% on the value of the estate over the NRB, unless other reliefs are available. Married couples and civil partners are able to transfer their unused NRB to be used on the surviving spouse’s death.

Can I leave my family home to my children without paying Inheritance Tax?

There is an additional allowance, the Residence Nil Rate Band (RNRB), which can be worth up to £175,000. To benefit from this, the following conditions must be met:

  • Your home forms part of your estate
  • You have left your home to your ‘direct descendants’
  • The total value of your estate is under £2,000,000.

Where this applies, you can leave assets of up to £500,000 to your children, providing the NRB has not been used against lifetime gifts.

The RNRB is also transferrable to the surviving spouse, meaning a married couple could pass, on the second death, up to £1,000,000 of assets (including the family home) without an IHT charge.

I received £200,000 from my father five and a half years before he died, will there be any IHT due?

When the gift was originally made it would have been a Potentially Exempt Transfer (PET). If a death occurs within seven years of the date of the gift, that PET becomes a failed PET, and falls within the IHT net. Whether there will be IHT to pay will depend on the total value of the estate at death, plus the value of all gifts in the seven years prior to death, less any available reliefs.

It is possible that the failed PET will be reduced to nil by the available Nil Rate Band (NRB). The NRB is set against failed PETs first, with only the remainder set against the value of the estate.

The gift was more than three years before death, so will the IHT bill will be reduced?

There is Taper Relief which is available to ‘taper’ (ie reduce) the IHT due where the gift is made between three and seven years of the death. It should be noted that this tapers the tax liability, it does not taper the value of the gift. In the above question, if the gift of £200,000 is wholly covered by the NRB, it will utilise £200,000 of the NRB, leaving up to £125,000 NRB to set against the value of the estate. As the tax due is £0 on the gift, there is no tax to taper.

If in that example the NRB is used on other earlier gifts, so that the £200,000 was chargeable at 40%, giving IHT of £80,000, then the £80,000 liability will be tapered. For a death five and a half years before death, the taper rate is 60%, thereby reducing the IHT by 60% to £32,000, an effective IHT rate of 16%.

If there was tax due on the gift of £200,000 from my father in his lifetime, who has to pay that tax?

Usually tax is paid from the estate funds by the Personal Representatives/Executors.  However, this depends on who the beneficiaries of the estate are, and who received lifetime gifts that are now failed PETs. If they are the same, and if there are sufficient funds in the estate, then the overall IHT liability will be paid from the estate.

However, if there is an IHT liability attributable to the failed PET that you received, and if there are not monies in the estate due to you that can be used to pay that IHT liability, then you will need to pay the outstanding tax personally. If you receive a gift from someone in their lifetime, it is advisable to check the tax position and consider holding back a reserve (for seven years) for any potential IHT, before spending the rest!

Tax is a complex area and the above Q & As are given as a simple guide only. You should always obtain specific advice that is relevant to your circumstances, before acting.

Relevant insights

The latest in inheritance tax from PKF