Inheritance Tax: always topical, never welcome!

14 October 2016

Inheritance Tax was once described as a largely voluntary tax by former Chancellor of the Exchequer, Roy Jenkins, a Labour MP, stating in 1986 that "it is, broadly speaking a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue".

In the tax year 2015/2016, HMRC collected approximately £4.7 billion in inheritance tax (Source:

I think that Roy Jenkins's view might be rather sweeping; however, there are some sensible financial planning opportunities that can be considered to reduce the effects of inheritance tax due.

One of the cornerstones of financial planning is to have an up to date Will in place. We also advocate the establishment of Power of Attorney arrangements for those over the age of 60, to ensure that your affairs are handled as you would wish should this become necessary. Speak to your legal adviser on these points, or alternatively we would be pleased to provide a local recommendation.

Each individual has a nil rate inheritance tax band of £325,000. Spouses can pass this to the surviving spouse/civil partner on death, affording a joint estate protection normally to £650,000. Thereafter, inheritance tax is usually charged at 40% on any balance above this level.

Many have adjusted their Wills some years back (before a rule change to allow the above), by moving property ownership from 'joint tenants' to 'tenants in common'. This now has limited value for inheritance tax purposes, but can still have some advantages for long term care planning. Many are aware that further inheritance tax savings will be achieved with legislation changes and my financial planning colleague, Vicky Fulcher, has provided significant detail on this in her blog here:

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There are some conflicts in inheritance tax planning, including the important issue of ensuring that there are enough funds available after any gifting achieved, if long term care is required. We can provide advice on this issue.

As we approach the end of the calendar year, we are aware from our experience that many start to focus on the family, its needs, and the ways they can help. Looking at this further, some could consider:

  • Annual Gift Allowance: £3,000 per donor per annum. If you did not use last year's allowance, you can go back one year to gift £6,000. Therefore, a couple could as an example give away £12,000. We think it is sensible to document this gifting in letter format to provide a suitable audit trail.
  • Gifts from surplus income: if after applicable tax, you have surplus income over and above what is needed to maintain your standard of living, this can be given away and should usually fall outside the estate immediately. This income can be gifted either directly to the recipient or into a trust and you might wish to establish a family trust to achieve this. The calculation to ensure that any surplus remains such should be documented each year. Care and planning is required here because some 'income', such as 5.0% gross pa withdrawals from investment bonds, are treated as return of capital and are not income for this purpose.
  • Potentially Exempt Transfers (PETs): If you want to make lump sum gifts away from your estate, either to a recipient or to a trust, you can do this (although the gift only falls fully outside your estate after seven years). There are beneficial tapering factors applicable from HMRC and these can be found here:
    Any gift (PET) made above the nil rate band of £325,000 can still be made, but it should be noted that any inheritance tax charge that may become due would fall on the recipient, rather than the estate.
  • Pension funds: These do not attract inheritance tax, but do attract a tax charge to beneficiaries when the plan holder dies after the age of 75.
  • Gifts to charities: These are not subject to inheritance tax and if you make significant gifts to charities from your estate, the inheritance tax charge can fall. Your estate may qualify to pay inheritance tax at a reduced rate of 36% (rather than 40%) if you leave at least 10% of your net estate to charity. HMRC has developed a helpful calculator which is useful in working out the amount needed to qualify:
  • Review: Solutions to inheritance planning are numerous and invariably use annual allowances. Using a combination of these options is not uncommon. It is important that any planning is reviewed regularly to ensure that it still meets its objectives, that annual gift allowances are used, and that the donor's needs are still protected. Giving money away can be rewarding, but only on terms that suit you and your circumstances.

As you can see, there is much to consider in terms of managing exposure to inheritance tax. The team at Chapters Financial is qualified to help clients and enquirers manage their objectives for making gifts and we are more than happy to work with your legal advisers in order to meet your ongoing needs. There is no individual advice provided in the content of this blog.

Chapters Financial can be contacted at our Guildford or Woking offices.

Keith Churchouse FPFS
Chartered Financial Planner
CFP Chartered FCSI
ISO22222 Certified

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.