Estate Planning and Inheritance Tax

The subject of Inheritance Tax (IHT) is never far from the minds of many of our clients. It is after all a tax on the transfer of wealth to future generations and much of that wealth has already suffered tax of one sort or another whether that be Income Tax, Capital Gains Tax, National Insurance contributions or Stamp Duty. The Treasury has been enjoying record inflows of IHT in recent years with the tax take hitting a record £5.4bn in 2018/19. In the current climate of political uncertainty, with the majority of parties airing differing views as to possible future tax changes, it is a perfect time to consider the current planning options.

In this article we will highlight the importance of correctly drafting Wills and look at IHT planning strategies.



The purpose of estate planning is to pass your assets to the people you want to benefit in a tax efficient way. A current, effective Will is a fundamental element of any family’s estate planning; this is because it should reflect your current wishes about the distribution of your assets and effective because it should be legally valid and tax efficient.

A current, effective Will enables a family to:

It is also important that your financial affairs are looked after by someone you trust, if you are unable to do so yourself. This can be achieved by the creation of a Lasting Power of Attorney (POA), a legal document by which a person (the donor), gives another person (the attorney), the power to act on his/her behalf.


IHT Planning Strategies

Having established a Will we then look at IHT planning where the starting point is an assessment of the likely IHT liability on death. There are a variety of options for reducing that liability, a number of which are outlined below.



Arguably, the easiest way to start IHT planning is to make gifts. Gifts to individuals are outright and unconditional; you can’t have the money back or benefit from the gift if it is to be effective for IHT planning.

Gifts of up to £3,000 each tax year are exempt from   IHT and any unused allowance from the previous tax year can be carried forward. You can make any number of small gifts of up to £250 per person each year.

You can also make gifts out of ‘normal expenditure’. This means that if you have more income than you need, you can gift the surplus and the gift will ordinarily be exempt. As a starting point, for the exemption to apply the gift must be made from income not capital, it must   be normal expenditure (usually demonstrated by the gift being made on a regular basis) and it must leave you with enough income to maintain your standard of living. Your adviser can discuss these rules with you in more detail.

Those thinking about larger cash gifts ordinarily won’t face any immediate IHT charges. However, if you make a gift you need to survive from seven to potentially 14 years from the date the gift is made for it to be completely outside of your estate for IHT purposes on your death. If you die before this time has passed some IHT may   be due on a tapered scale. Many clients choose to do this as it’s an effective way of reducing a potential IHT liability, but for others, making a gift is not appealing.


Life Assurance

Outside of gifting, a bewildering array of products are available to help with IHT planning. Arguably, the simplest is life assurance. Take Whole of Life assurance for example. In return for a regular premium, Whole of Life cover guarantees to pay a sum assured whenever you die. However, the key to effective planning is not the life assurance policy itself but ensuring that the policy is put in trust for your beneficiaries. Without the trust, proceeds on death will ordinarily form part of your estate and be subject to IHT, which defeats its very purpose.

It may be appropriate to look at other types of life assurance depending on your circumstances and objectives. Your adviser will discuss this with you.


Business Relief (BR)

If you decide not to make outright gifts during your lifetime and/or where life assurance is not appropriate, investing tax efficiently allows you to keep control of your money whilst achieving an IHT saving over time. Typically, this is achieved by investing in assets that qualify for Business Relief (BR) which reduces the value of the asset when calculating how much IHT has to be paid.

Investing in a portfolio of Alternative Investment Market (AIM) shares is a good example. Certain AIM shares qualify for BR and once you have held the shares for two years, they qualify for 100% BR meaning a zero value for IHT purposes. You own the AIM shares and, unlike an outright gift, can access the capital if required.

However, AIM shares are higher risk, volatile securities. In the worst case scenario, you could lose 100% of an AIM investment. Care must be taken to ensure you have the risk tolerance and capacity for loss to make this kind of investment.

For those wishing to mitigate IHT but not willing or able to take higher levels of investment risk there are alternatives. Many specialist companies design structured investments that offer clients BR but with lower volatility and returns uncorrelated to equities.

This is achieved by investing in asset backed trades like renewable energy farms, forestry and commercial lending. The aim of these schemes is to mitigate a 40% IHT liability, not to yield high investment returns.


Enterprise Investment Scheme (EIS)

Many of the concerns about AIM are similar to those which arise from another type of investment offering IHT benefits, the Enterprise Investment Scheme (EIS). These schemes offer a very broad range of tax incentives and are perhaps better known for the opportunity to defer Capital Gains Tax or mitigate Income Tax. From an IHT perspective, EIS shares ordinarily qualify for BR after two years giving a zero value for IHT if it is still held on death.

EISs are also high risk investments, although there are varying degrees of risk across individual schemes, and are unlikely to be suitable for cautious clients without a broad asset base. The liquidity, or illiquidity, of an EIS should always be kept in mind. After your death your beneficiaries, who want to access their inheritance, may be frustrated by the inability to sell EIS shares quickly or without suffering tax charges.

Other Options

There are a number of trust based products that can be used to assist with IHT planning, some of which can give you access to the capital invested or an income stream. Your adviser will discuss your individual circumstances with you to see if these are appropriate. Often the solution may be a combination of gifting and tax efficient investment.


What Action to Take

There are a broad range of IHT solutions and often your objectives will be met by a combination of these. IHT, in whatever form it takes, will continue to be an emotive issue. Action taken during your lifetime will help to direct your assets in line with your wishes even when you are no longer able to give that direction.

IHT planning is a complex area and we would encourage you to contact your usual Brown Shipley Adviser to discuss your plans further.

Rebecca Williams // Client Director

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