Understanding Inheritance Tax in the UK: Key Considerations

Inheritance Tax (IHT) is a significant concern for many families in the UK. With frozen thresholds and increasing property values, more estates are subject to this tax. This blog explores the essentials of IHT and offers insights into mitigating its impact. While we are experts in estate administration, we do not provide financial advice. Our goal is to assist you with the probate process and estate administration. 

The Current Landscape of Inheritance Tax

Estate Planning: Mitigation Strategies

Lifetime Gifting and Trusts

Gifting

One effective way to reduce the IHT burden is through lifetime gifting. What does this mean? Well, certain gifts can immediately fall outside your estate (what’s left when you die) for IHT purposes. For instance, annual gifts of up to £3,000, wedding gifts of up to £5,000, and multiple smaller gifts of up to £250 per person are exempt from IHT.  
So, for instance, if you gift all your children £250, then this would not count for tax purposes when your estate is assessed for IHT. 
Gifts exceeding these allowances are tax-free only if the donor survives for seven years after making the gift. 

A high-profile example of the above is from TV personality Anne Robinson, who has reportedly decided to give away her estimated fortune of £50 million to minimise the amount of IHT payable on her death. However, if Anne died within the next seven years, the IHT she was trying to avoid, would be due, and Anne's family would be likely to pay the IHT on the gifts that they had received. 

These gifts would also become part of the recipients' own estates for IHT purposes, leaving them open to a form of double taxation. There may be reliefs available in certain circumstances, and expert advice would need to be taken at the time to ensure the appropriate relief is claimed, such as Quick Succession Relief. 

If you have followed our Gifting series on social media, you will know that there are many more considerations when it comes to gifting. We would advise speaking to a financial advisor to explore the potential benefits this can offer to your estate. 

Trusts

Trusts also offer a robust solution for estate planning. Trusts allow the transfer of assets while retaining some control over how they are used. They can be particularly effective in managing substantial wealth and ensuring that beneficiaries use their assets wisely. However, setting up and maintaining a trust involves administrative duties and compliance with HM Revenue & Customs (HMRC) regulations. 

Property Trusts

When a Property Trust is involved, the first thing that we look out for is whether the Trust is drafted correctly within the Will. Occasionally, we find Property Trusts incorrectly drafted due to the life tenant (the person who has been granted the legal ownership of the property) and the remainderman (the person who gets the property when the aforementioned life tenant dies) being specified as the same person – ultimately, the remainderman will fail when it comes to the life interest ending. 

For example, Person C owns a physical property. Person C bequeaths a piece of property to Person A for life and then to Person B upon Person A’s death. Person B is the rightful owner of a future interest and the remainder. Person A is the owner of the property until they die. 

Nil Rate Band Discretionary Trust (NRBDT) 

What is NRBT? Read more here.

An important consideration for this type of Trust is ‘discretion’. When setting up an NRBDT, Trustees have various options available to them (subject to the terms of the Will). We’ve dealt with thousands of NRBDTs as part of the estate administration process, explaining the options in plain English so the Trustees can make informed decisions. We guide them through their options and ensure they fully understand their role and responsibilities to cover all beneficiaries and not just the surviving spouse; they need to make responsible decisions (taking independent advice as appropriate), rather than just considering the best Inheritance Tax (IHT) solution. 

Trusts for Minors 

Hopefully, the Trustees are clearly outlined in the Will – whether they are listed in the Executor clause or within a specific Trustee clause. These types of Trusts can be tricky because the minors might be very young at the time it’s produced. However, it’s all about trying to futureproof the Trustees in fifteen years by considering how old they will be and whether they will want to do it at that time – family circumstances can also change. 

You can read more about these types of trusts here. 

The Importance of Professional Advice

Navigating the complexities of IHT requires professional guidance. Wealth planners can offer personalised strategies that align with your financial goals and family needs. From leveraging pension schemes to exploring business reliefs, professional advice ensures that your estate planning is comprehensive and effective. 

Our Role in Estate Planning 

As experts in estate administration, we understand the challenges and nuances of managing estates and ensuring compliance with IHT regulations. Our focus is on assisting families through the probate process and providing support to partners in delivering their estate planning services. We are here to help you with the estate administration following death, allowing financial advisors and wealth planners to focus on estate planning and minimising IHT liabilities. 

As the UK’s population ages and more estates fall within the IHT threshold, understanding and planning for IHT is crucial. Implementing strategies such as lifetime gifting, setting up trusts, or utilising Family Investment Companies can significantly reduce the tax burden and secure your family's financial future. Seeking professional advice will help you navigate these options and optimise your estate planning efforts. 

However, with the General Election imminent, IHT could change… As the election campaigning started, Jeremy Hunt, the current Chancellor, described IHT as a profoundly Anti-Conservative. While not yet making any pledges to scrap IHT, he has said that the Conservatives would look to reduce it over time.  

If Labour wins the General Election, will they increase IHT? We can’t know for certain, but both, Sir Keir Starmer and Labour Shadow Chancellor, Rachel Reeves, have previously suggested that some IHT exemptions and allowances are too low.  

By partnering with us, you can ensure a seamless estate administration process, providing your clients with the best possible support and expertise in managing their estates. 

Kings Court Trust is a probate and estate administration provider that offers award-winning solutions to support every family.

Whether you need a hand obtaining the Grant of Representation, completing the complicated tax and legal work, or anything in between, you’re in safe hands with our team of specialists.

If you have any questions about the estate administration process, including applying for the Grant of Representation, call our Client Services Team on 0300 303 9000 or fill in the form below.