- The due date for the IHT liability of £240,000 payable by the personal representatives of Alfred’s estate is 30 June 2022.
- Alfred’s wife will inherit £250,000, his brother will inherit £50,000 and the children will inherit the residue of the estate of £310,000 (850,000 – 250,000 – 50,000 – 240,000).
Basic inheritance tax planning
Make gifts early in life
Gifts should be made as early in life as possible so that there is a greater chance of the donor surviving for seven years.
Gifts made just before death will be of little or no IHT benefit, and may result in a capital gains tax liability (whereas transfers on death are exempt disposals).
Make use of the nil rate band
Gifts can be made to trusts up to the amount of the nil rate band every seven years without incurring any immediate charge to IHT.
Gifts to trusts within seven years of each other will be subject to the seven year cumulation period, whilst an immediate charge to IHT will arise if a gift exceeds the nil rate band.
However, as far as TX-UK is concerned, there is no advantage to making gifts to a trust on death. This will not save any IHT.
Skip a generation
When making gifts either during lifetime or on death, it can be beneficial to skip a generation so that gifts are made to grandchildren rather than children. This avoids a further charge to IHT when the children die. Gifts will then only be taxed once before being inherited by the grandchildren, rather than twice.
Of course such planning depends on the children already having sufficient assets for their financial needs.
Residence nil rate band
Given that the residence nil rate band is only available where inheritance is by direct descendants, rearranging the terms of a will can save IHT.
EXAMPLE 26
Victor has an estate valued at £1,400,000, including a main residence valued at £550,000. He has not made any lifetime gifts. Victor’s wife died on 17 May 2011 and all of her estate was left to Victor. Under the terms of his will, Victor has left his main residence to his brother, with the residue of the estate left to his children.
Currently, Victor’s estate will benefit from a nil rate band of £650,000 (325,000 + 325,000). The residence nil rate band is not available because the main residence will not be inherited by a direct descendant.
Victor could amend the terms of his will so that his brother inherited £550,000 of other assets, with the main residence being included within the residue. A residence nil rate band of £350,000 (175,000 + 175,000) would then be available, saving IHT of £140,000 (350,000 at 40%).
There is no reason why Victor’s brother could not purchase the main residence from the children following Victor’s death.
Capital gains tax (CGT)
Although the interaction of IHT and CGT is not examinable at TX-UK, the two taxes could be examined within the same question and the information given could be relevant to both taxes.
For a lifetime gift of unquoted shares, the IHT transfer of value will be based on the diminution in value of the donor’s estate. In contrast, for CGT purposes the valuation will be based on the market value of the shares gifted.
As far as tax planning is concerned, a lifetime gift can avoid or reduce the IHT that would arise if assets were retained until death. However, the potential IHT saving must be weighed against any immediate CGT cost. There are no CGT implications if assets are retained until death, because transfers on death are exempt disposals. CGT is not an issue if a cash gift is made.
EXAMPLE 27
On 20 June 2021, Craig made a gift to his grandson of a residential property, which was not his main residence, valued at £250,000. The gift of the property resulted in a chargeable gain of £145,000.
The value of the property is expected to increase to £300,000 by 31 December 2023, and to £340,000 by 31 December 2028.
Craig is an additional rate taxpayer. He will not make any other disposals during the tax year 2021-22, and he has not made any previous lifetime gifts. Craig has an estate valued in excess of £2,000,000 for IHT purposes.
CGT liability
Craig’s CGT liability for 2021-22 is: