Inheritance tax planning

Gifting can be a powerful way to reduce the value of your estate for Inheritance Tax (IHT) purposes. Each tax year, you can gift up to £3,000 without it being added to the value of your estate. If unused, this allowance can be carried forward one year, allowing a potential £6,000 exemption.

However, people often forget that gifts made regularly from your surplus income (not capital) can be unlimited, and may be exempt from IHT if:

• The gifts do not affect your standard of living.
• The gifts form part of a regular pattern of giving.
• You/your executors can demonstrate that the gifts are made from income, not savings.

Investment bonds, whether onshore or offshore, have fantastic tax advantages while the policy holder is alive, such as the 5% tax deferred withdrawals and no Capital Gains on any investment growth. However, these policies can be wrapped in simple trust structures to ensure they are IHT efficient, not to mention that ‘segments’ of the bond can be assigned to family members, without the need to encash the product and cause undue tax.

There are a range of trusts available for bonds, so it is vital you understand the pro’s and con’s of each before choosing, this is where our Chartered Financial Planners can help.

An often under utilised IHT strategy is investing in assets that qualify for Business Relief (BR) formerly known as Business Property Relief. Often these investments are not liable to IHT  after just 2 years, so you haven’t got the 7-year clock like on gifts and some trusts.

There are a range of products (and acronyms!) such as AIM, EIS & EPS available to investors. This is a specialist area of financial planning with unique attributes, however this also comes with some increased risks, we can help guide you through BR investing to ensure it is suitable for you and your goals.

Perhaps the simplest of the options. While taking out life insurance (and placing the policy into a trust) doesn’t mitigate your future IHT bill, it does insure against it. If you would like a simple solution to provide you with peace of mind that some or all of your IHT is covered, then a life insurance policy could be suitable. Though do note on large sums assured there may need to be fine tuning to using trusts, to ensure it is as IHT efficient as possible.

We are seeing this option become more prevalent as some clients look to react to the changes in pension legislation from 2027, by using pension income to pay for the premiums of a life insurance policy, therefore mitigating IHT twice over.

From April 2027, unspent pensions will form part of your estate for IHT purposes. We are therefore having many conversations with people about how we can reduce their IHT liability with specific regard to their pension assets.

An annuity essentially means exchanging part or all of your pension in return for guaranteed income for the rest of your life. Your pension pot is given to the annuity provider, and therefore this amount is immediately outside your estate for IHT purposes, it is not a gift so there is no 7-year clock.

For clients who require a reliable and consistent level of income from their pension, as well as wanting to reduce a potential IHT liability, this is an increasingly attractive strategy (but only if you spend this annuity income!).