INHERITANCE TAX PLANNING STRATEGIES :
The priority must therefore be to make sure that you have not
only what you need now, but also looking ahead, and as the
saying goes: 'do not let the tax tail wag the dog!' In such
situations IHT-planning remains important but it should not be
your top priority.
Perhaps we should just remind you of the fact that if you
are/become in poor health and subsequently need residential or
nursing care you could be penalised. If you have given assets
away, you could easily be perceived as having deliberately
'deprived yourself of assets' which would count against you
should you seek local authority assistance with care funding in
It is generally wise to employ a predictive cash-flow model in
these cases to forecast the likely levels of future income,
If you are so lucky to have e.g. an index-linked state pension,
a personal pension and/or a decent final salary pension then
your future income has a good chance of keeping up with
inflation and your changing requirements.
In such circumstances the aim is to maintain the level of wealth
close to, or below, the threshold without impacting on
Ways in which this can be done is through the use of various
tax-exempt gift options.
1. The annual
You are allowed to give away up to £3,000 each tax year (or
£6,000 per year for a married couple) to one or more people,
without any tax liability.
If you did not use your previous year's allowance you can carry
it forward to the current tax year which would enable couples to
give away up to £12,000 in their first year of ‘gifting’.
2. The small
Unlimited gifts of up to £250 can be made each tax year although
they can not be gifted to the same person who received the
annual £3,000 gift.
3. Gifts out of
This exemption is perhaps one of the most important of the
‘gift-exemptions’ as it potentially carries the greatest scope
for asset transfer.
This important opportunity is only available to you if you find
that you have more income than you need in retirement.
Provided you can prove that it does not affect your normal
lifestyle, monthly or annual gifts can be made out of regular
income. It's also possible to make exempt gifts to people who
are getting married, though these are generally less significant
as they are likely to be somewhat infrequent!.
They include up to £5,000 from each parent of the couple; £2,500
from each grandparent or more remote relative; £2,500 from
bridegroom to bride (and vice versa) and between civil partners;
£1,000 from anyone else.
A different, but straight forward and often effective solution
is to establish:
against IHT liabilities
It’s always a hard time when a loved one dies, but if your heirs
also are forced to e.g. take out large loans at short notice,
just to pay IHT on the inheritance you’ve left them it can cause
much extra stress and hardship.
One way to protect your family or loved ones from this after you
die, is to take out an ‘Inheritance Tax Insurance’ to make sure
that your family get what you left them, be it money or
property, without having to pay a hefty fee first in order to
even access it.
This can sometimes be deeply ironic if you have left money that
could, in different circumstance, actually be used to pay this
One way of doing this is to get inheritance tax insurance and to
put in place either a term or whole-of-life plan written in
trust for the beneficiaries, which will pay out on death. The
idea is that the sum assured should at least match the potential
IHT charge, so that if you die within the cover period (or
before assets have been transferred to your beneficiaries in a
tax-exempt manner) your beneficiaries won't have to meet the
In general, it's important to understand that whole-of-life
insurance policies do not enable you to avoid tax - merely to
pay for it in advance, and by instalments. Decreasing term life
insurance written in trust can be extremely useful in situations
where potentially exempt gifts (PETs) are being considered (see
section on PET rules)
5. Transfer of
Sometimes, couples may find they have an unused (deferred)
pension pots they don't need to draw on at all for income. In
such cases, it's possible to wrap a pension trust around it so
that someone instead of the spouse can inherit the benefits free
of IHT on death.
You can normally nominate a beneficiary (generally the spouse)
for unused pension benefits, by way of a notification given to
the pension fund trustees. However, they have discretion as to
whom they accept to pay the benefits to.
The use of a trust ensures that the pension goes to the
beneficiaries you intended, and also removes the value of the
assets from the joint estate thus keeping the value on second
death below the current £650,000 threshold.