Ways to mitigate your Inheritance Tax position

Our experts share their thoughts on a typical Inheritance Tax query, offering examples of things you may want to consider

“I am interested in exploring ways to mitigate my Inheritance Tax position following on from the budget.  My main assets are my family home £1.2m with no mortgage, my pension worth £1m, cash and investments including ISAs worth £300k and shares in a trading company worth £3m and a couple of classic cars. I am married with three teenage children.” 

Jo White, Tax Partner 

If the value of your estate when you die exceeds the Nil Rate Band (“NRB”) (currently £325,000) Inheritance Tax (“IHT”) is payable at 40% on the excess when left to a non-exempt beneficiary. 

Additional Residential NRB (“RNRB”)

When leaving your home to a qualifying descendent upon your death your estate could benefit from an additional Residential NRB (“RNRB”), up to £175,000 in 2024/25, against the value of your home. This is tapered where the value of your estate exceeds £2m. 

In this situation you could look to take steps to bring your estate’s value under the threshold whether through lifetime estate planning or through changing your Will. Where you have survived a spouse or civil partner, there are potentially transferrable NRBs and RNRBs that could be utilised. 

Making a gift to an individual or into trust

You could reduce the value of your estate by making a lifetime gift to an individual or into trust. If you survive seven years, it is not treated as forming part of your estate on your death. Watch out though as a gift to a trust is immediately chargeable to IHT, so could result in a tax charge if the NRB is exceeded. Smaller exempt gifts can be made each year. 

Classic cars are not exempt from IHT, they will be classed as part of the estate. A potential way to mitigate this would be for the owner to gift these to a beneficiary before their death. Care should however be taken that the owner does not continue to enjoy use of these items as this could be classed as a gift with reservation, for which a tax charge would be payable. Planning around this however may be possible. 

Be aware of non-cash gifts as these could result in a capital gains tax liability. 

Considerations for shares in a business

As you own shares in a business, there were changes announced in the budget (30 October 2024) which will impact you from 6 April 2026 limiting Business Property Relief (BPR) to 100% on the first £1m of qualifying value and 50% thereafter.  If you hold AIM listed shares in your ISA BPR will be capped at 50% on the value of these investments.  We would recommend you consider whether to gift (direct or to a trust) your company shares now to ensure the value of your shareholding does not exceed £1m.  Other steps could also be taken to freeze the value of your shareholding.  If your wife doesn’t hold any of these shares transferring some to her will allow you to benefit from her lifetime allowance after 2 years. 

To fully understand the impact of the IHT changes and how they will affect you then see table below  

Gemma Spencer, Partner, Solicitor and Joint Head of Legal Services  

Your Wills leave all assets to the surviving spouse and then to your three children equally. You have assets over £5.5m which means your combined estates will be exposed to IHT at 40% in excess of any available NRBs. 

Use of Trusts

Due to the age of your children, you may want to settle some of your assets into a trust in your  Wills so that they can benefit at a later date and the assets can continue to be looked after by trustees chosen by you until your children are ready to take the assets outright. 

You will need to consider carefully how the assets in the trust are to be used and this would be set out in your Will. 

There are several different types of trust, for example: 

• A Bare trust is where the assets in the trust are held in the name of a trustee for the benefit of a specific beneficiary or group of beneficiaries who has/have the right to both the capital and income from the trust.  

• An interest in possession trust is where the beneficiary is entitled to trust income as it’s produced.  

• A discretionary trust can offer flexibility as to which beneficiaries benefit, how they benefit and when.  

Trusts can also be set up for a specific class of beneficiary such as a vulnerable person or a bereaved minor. 

Using a Trust during your lifetime

Trusts can be an effective way to transfer wealth on to future generations during your lifetime. Though you cannot benefit from them, you can retain control of the assets acting as trustee.   

Trusts are complicated and whether they are subject to IHT, CGT and income tax will depend on the type of trust and how it was created.    

Due to the value of your estate and the age of your children, your Wills need to be reviewed regularly and kept up to date to ensure they stay consistent with your wishes as your circumstances change. 

KRFPS – Vince Molloy, Chartered Financial Planner 

Pensions

Previously a pension was an efficient estate planning tool, but changes announced in the budget (30 October 2024) means from 6 April 2027, pension death benefits will be included as part of an individual’s estate and subject to IHT along with other investments and assets. 

It may still be tax efficient to use some of the cash held for making further pension contributions. Several considerations should be given though, as once made, any accumulated benefits will not usually be accessible until the policyholder reaches age 55 (rising to age 57 in 2028), subject to policy conditions. Furthermore, there are annual and lifetime allowances which you need to be mindful of. 

ISAs

Unless left to a surviving spouse or civil partner, ISAs will ordinarily be subject to IHT. On the death of an individual, the surviving spouse or civil partner also benefit from a one-off additional ISA allowance equal to the amount formerly saved in these tax-free accounts, on top of their own ISA allowance. The favourable tax treatment of ISAs means that by making the full subscription of £20,000 (2024/25 tax year) is key consideration of any financial plan.  The £20,000 annual subscription can be as Cash or Stocks & Shares. 

Cash investments

The exact IHT treatment of investments held can be complex depending on the specific investments held and professional advice should be sought. Appropriateness of different types of investment will also depend on a particular individual’s personal situation and appetite for risk. Be aware that Venture Capital Trusts (“VCT”) do not ordinarily qualify for IHT relief, even though their underlying holdings might. This is because when investing in a VCT, you acquire share in the VCT plc, not in its underlying holdings. 

On the other hand, Enterprise Investment Scheme (“EIS”) investments can potentially allow investors to defer Capital Gains Tax on other investments and depending on exact circumstances, reduce the value of an individual’s estate for inheritance tax purposes. EIS investments can provide up to 100% exemption from IHT because of Business Property Relief. 

The majority of other traditional investments and cash will not automatically benefit from any IHT exemption, however, do seek professional advice as this can be dependent on the type of investment, who and where held. 

Life Assurance

In many circumstances there may still be a potential IHT charge on the value of the estate. Life cover policies can sometimes be helpful in these instances to pay out a lump sum upon second death, which if written under a suitable Trust could fall outside of the estate.  Probate may not be required on these funds meaning the life assurance proceeds can be paid to the beneficiaries without delay and may avoid the necessity for the executors to liquidate assets (such as selling the family home) to then pay the IHT bill.  When making lifetime gifts, life insurance policies could be set up with the intention of covering any potential IHT charge resulting from the death of the donor within 7 years.   

For more information and advice, please contact us or call +44 (0)330 124 1399. 

The content of this article is for information only and does not constitute formal financial advice.  

This material is for general information only and does not constitute investment, tax, legal or other forms of advice. You should not rely on this information to make, or refrain from making, any decisions. Always obtain independent, professional advice for your own situation.