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Inheritance Tax (IHT) planning - using your tax allowances

The following case study illustrates a typical IHT planning issue for UK domiciled clients along with potential solutions. A full fact find would need to be completed to assess suitability of the potential solutions by the adviser. The solutions are based on exemptions and allowances available under the rules in force at the date of this article for the tax year 2015/16.

Case study

Jim and Margaret are in their late 60’s and have 2 children and 4 grandchildren. 

They are concerned their estate may be liable to IHT following their deaths as their house is worth £350,000 and their joint savings total £120,000.

Jim and Margaret were civil servants and have a good pension in retirement so they do not need to supplement their income. They also don’t want to give away all their savings but would like to minimise their IHT liability and maximise the amount their family can inherit. They have not made any gifts in the last 7 years. 

What IHT planning options may be suitable?

  • They could make outright gifts of £6,000 each to utilise their annual exemption for IHT.
  • They could also put £3,600 a year each into a UK registered pension scheme which they could use at a future date for supplementing income or even take 25% back without any income tax and the fund itself is exempt from IHT.
  • They could invest a lump sum in a bond and wrap a loan trust around this. They will still retain the right to the capital but any growth will be immediately outside their estates for IHT. Should Jim and Margaret no longer want access to the repayment of the loan they could waive their entitlement to all or part of it, which would be a gift for IHT purposes.
  • Finally, depending on their health they could set up a Joint Life Last Death Guaranteed Whole of Life Term Assurance subject to a settlor excluded discretionary trust to cover the current IHT liability and request indexation. Premiums if paid from their pension income are likely to qualify for normal expenditure out of income exemption and therefore would not be chargeable lifetime transfers for IHT.

Considerations

  • If a number of gifting solutions are to be used, the chronological order of those gifts becomes relevant. In short, pension contributions and exempt transfers first, then loan trusts, Chargeable Lifetime Transfers then Potentially Exempt Transfers.

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