INHERITANCE TAX PLANNING STRATEGIES :
1. Potentially Exempt Transfers (PETs)
If you are in possession of assets which are not essential to
maintaining you style of life for the foreseeable long-term
future and the various exempt gift allowances have been used,
one option is simply to give them away to whomever you see fit.
If you do this, they will be treated as Potentially Exempt
Transfers (in jargon: PETs), which means that if
you survive for seven years after making the gift it will fall
entirely outside your estate for IHT purposes.
However, one risk for people with assets in the region of the
NRB-threshold is that they will find themselves taken aback by
unforeseen twists of fate.
In such situations it can sometimes be a better idea to consider
giving away a share of the home directly to e.g. your children,
although it will mean that you (and your spouse) will have to
pay them the going market-price to rent their share of the
The advantage though, is that not only will the gift be outside
the estate in seven years' time, but in the meantime the rent
paid will also amounts to a transfer of assets to your children.
Property may be an asset but it brings its own liabilities and
expenses. So, in many cases it is better for a retired person(s)
to have cash in the bank (or liquid investments) and less
property to worry about.
2. Gift inter vivos insurance
If you make a PET to a friend or family member but have concerns
that you may not survive the full seven years to ensure full tax
exemption, it's possible for the beneficiary (or you, if you're
feeling generous) to take out a single-premium decreasing life
policy to protect against any potential IHT.
The sum assured falls over the seven-year term, mirroring the
reducing IHT liability; if you die during that time, the policy
pays out a tax-free lump sum to cover whatever is due to HMRC.
You must remember that if you were to give e.g. your son or
daughter one of your Rembrandts and he/she sells it and spends
all the money and you die of grief before the 7 years are up,
they will be liable for the incurred IHT on a retrospective
basis even if the money have all gone!
3. Discretionary and other trusts
If you feel reluctant to make outright PETs - whether because
you do not fully trust the beneficiaries, or perhaps are
concerned about their marriage or business prospects etc. a
sensible option is to use a so-called: Discretionary Trust.
Under this arrangement, up to £325,000 of assets can be put into
a trust for the beneficiaries without any immediate tax charge.
After seven years they will be outside the estate, but the
advantage is that you can retain a degree of control over their
management and distribution in the meantime.
Another possibility is to use a Flexible Reversionary Interest
Trust (FRIT) that enables you or your spouse to receive
an income from those assets if necessary at a later date, but
with the trust able to make gifts to beneficiaries during your
Flexible Reversionary Trusts are complex products and will not
be described in further detail here; suffice to say that such
policies can be structured as a series of single premium life
assurance polices and that some of these trust can invest in any
unit trust and thus be matched to your individual's risk
tolerance. In addition, regular income is available which
increases your overall level of flexibility.
By using life insurance products within a trust, it is possible
to avoid any tax returns or the payment of excess tax by the
trustees, so it's often cheaper to do this than to use
Transferring assets into trusts are generally irreversible and
can be very complex indeed. It is therefore essential that
professional advice is sought before such endeavours are