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Welcome to EJ Financial Limited

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07484 138682

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Stockmarket1 Tax Planning2 Retirement Planning3

Inheritance Tax (IHT)

The basic inheritance Tax allowance for tax year 2017/18 on death is £325,000 per person and is called the Nil Rate Band (NRB).

Assets of married couples or civil partners may be passed to each other on first death with no IHT charges.

Married couples or Civil Partners may use both NRBs (£650,000 in total) on second death, assuming none was used on first death.

Values over the NRB are subject to 40% IHT.

There are mitigation rules that allow you to remove assets from your estate before death and they are as follows:

  • Any gifts out of income that do not affect the standard living of the giftor
  • £3,000 per person may be gifted away each tax year, including the previous tax year if not used. This tax year’s allowance must be used first. (cannot be combined with a £250 gift)
  • Gifts up to £325,000, made 7+ years previously are outside of the estate for inheritance tax. Up to 7 years they are classed as Potentially Exempt Transfers (PETs) and there is tapered tax relief*
  • Gifts to UK-established Charities, National Museums, National Trust, Universities, Political Parties (with at least two MP’s), Registered Housing Associations and Community Amateur Sports Clubs are exempt
  • Gifts to people getting married of up to £5,000 from each parent of the couple, £2,500 from each Grandparent or more remote relative, £2,500 from bridegroom to bride and vice versa and between civil partners, £1,000 from anyone else
  • Any number of gifts of up to £250 to each recipient. These gifts are meant to cover things such as birthday or Christmas presents
  • Gifts for maintenance of Husband, wife or civil partner, ex-husband, ex-wife or ex-civil partner and relatives dependent on you through old age and infirmity
  • Gifts for maintenance, education or training of your children (including step children and adopted children), in full-time education or age 18 or under

*The 7 year IHT Tapering Rule

Years between gift and death

Tax to be paid

Less than 3


3 to 4


4 to 5


5 to 6


6 to 7


7 or more


Gifts are not counted towards the value of your estate after 7 years

Click here to download an IHT Gifting Schedule

Ten Financial Planning ideas for mitigating Inheritance Tax

Below are ten Inheritance Tax mitigation ideas which often come up in discussion with clients who are trying to reduce the value of their estate for Inheritance Tax purposes:

1) Normal expenditure out of income exemption

In the event that a client receives a surplus income over and above the outgoings required to maintain their standard of living, then this exemption may be very effective. However, this does depend on the specific circumstances of the client.

It is advisable that the individual keeps accurate records showing their net income after tax and all outgoings paid each year along with documentary evidence of the relevant regular gifts which have been made.

2) Other exemptions, such as the annual, small gift and wedding gift exemptions

It is worth remembering that the first £3,000 of a lifetime transfer in any tax year is exempt. This exemption can be carried forward for one tax year if unused. Therefore it is possible for a married couple to gift away as much as £12,000 using the annual exemption, on the basis neither of them have used the exemption already in the current or previous tax year.

In addition, lifetime gifts to any person that do not exceed £250 in a tax year are exempt.
Furthermore, lifetime gifts in consideration of marriage are also exempt and for example parents can gift £5,000, grandparents can gift £2,500 and gifts of up to £1,000 can be paid from others.

3) Discounted Gift Trust

As the name suggests, a Discounted Gift Trust aims to provide the settlor, or settlors, with an immediate discount to their potential Inheritance Tax liability, with any growth on the trust fund falling outside of their estate for Inheritance Tax purposes from day one. A Discounted Gift Trust involves a single premium investment bond being written under a suitable trust. As the settlor retains the right to a chosen level of income during their lifetime, this will have a value for Inheritance Tax purposes which will stay inside of the estate. As such, for the purposes of calculating the gift at outset, the value of the full investment can therefore be reduced (or “discounted) by this “retained value”. The actual value of the “retained fund” is calculated taking into account the settlor’s sex, age and state of health, and the amount and frequency of the capital payments they are entitled to, and is calculated on application. The remaining part of the investment will only be fully deducted from your estate for Inheritance Tax if you survive seven years.

Please note the income you receive must be determined and fixed at outset, and once this has been set up, it cannot be terminated or altered at any time, or in any way.

4) Loan Trust

A loan trust is an attractive option in inheritance tax planning for those individuals who do not want to make an outright gift. It is designed to reduce an individual’s potential inheritance tax liability, yet still enable that individual to retain the right to receive a regular income.

The settlor makes a loan to the trustees, expressed to be interest free, and repayable on demand. The trustees invest this in an investment bond, then take annual part withdrawals and pay these to the settlor in repayment of the loan. These will typically be set at 5% per annum and repayable on demand. On the settlor’s later death, the outstanding loan would normally form part of their estate for inheritance tax purposes. However, any growth on the invested monies and the “loan repayments”, assuming they were spent as income, will be outside of their estate for inheritance tax purposes.

5) Guaranteed Whole of Life

A whole of life policy can be effected in trust to pay a potentially exempt sum to the beneficiaries of a client’s estate to meet the Inheritance Tax liability. The life cover premium can potentially be claimed against the £3,000 annual exemption or normal expenditure out of income.

We often recommend what is known as a Guaranteed whole of life insurance policy because this provides a guaranteed sum assured payable on death and/or the diagnosis of a pre-determined critical illness in return for a set fixed monthly premium. As the name suggests, the period of cover is not subject to a specific term.

Unlike a unit linked whole of life plan, this contract has no cash-in or surrender value at any time, which means if you stop paying your premiums the cover will cease and no refund or surrender value will be paid.

6) Enterprise Investment Scheme

An Enterprise Investment Scheme (EIS) offers generous income and capital gains tax relief to individuals investing in certain companies. The relief is available to qualifying individuals who subscribe for eligible companies undertaking a qualifying business activity. An EIS will typically invest in small fledgling companies who are looking for further investment to develop their business.

Relief can be claimed up to a maximum of £1,000,000 invested in such shares, giving a maximum tax reduction in any one year of £300,000 providing the investor has sufficient Income Tax liability to cover it.

There will be no capital gains tax to pay on disposal provided the shares are held for three years and income tax relief was initially granted and not withdrawn on the shares in question. It is also possible to defer a capital gain realised on a different asset where the disposal of that asset was less than 36 months before the EIS investment or less than 12 months after. EIS investments are exempt from inheritance tax provided the investment is held for two years.

7) Keep records of gifts

This is perhaps the best-known way of reducing an individual’s IHT liability. Gifts made over seven years ago are normally free from IHT.

If an individual expresses concerns about passing outright gifts over to their children, then trusts can be used as a protective structure.

HMRC will want to know of the details of all gifts after death, and the executors’ job will be made far easier if a record of the types and amounts of the gifts is maintained.

8) Business property relief and shareholder protection

Business asset relief can provide a reduction of 100% (50% in limited circumstances) in the net value of relevant property in a qualifying business for inheritance tax (IHT) purposes. Relevant property includes shareholdings in unquoted trading companies, partnership interests, the business of a sole trader and controlling shareholdings in a quoted company.

If a business owner dies with no share protection in place then his or her share in the business may be passed to their family. However it is worth noting that this could mean that any surviving business owners could lose control of a proportion or, in some circumstances, all of the business. The family may choose to become involved in the on going running of business or could even sell their share to a competitor. A share protection policy can normally help to avoid these issues, and this is something we can assist with at Skerritts.

9) Agricultural property relief

Agricultural property relief is another valuable relief, which, like business relief, can reduce the value of agricultural property to nil for IHT purposes.

In assessing a claim for agricultural property relief, among other issues, HMRC will consider the status of the farmer at the date of the farmer’s death, when it will be necessary to show that the property was occupied for agricultural purposes and has been for the entire two-year period leading up to the date of death.

10) ISA AIM portfolio

On 5 August 2013, the Government announced a change to the ISA rules, allowing AIM (Alternative Investment Market) shares to be held in an Individual Savings Account (ISA) for the first time. However, if an investor already holds AIM shares these cannot simply be moved into an ISA. If an investor sells an investment that currently qualifies for EIS and their ISA manager uses the proceeds to purchase a replacement holding of the same shares for investment in an ISA, the effect would be that the sale of the original holding will be a disposal for the purpose of the provisions for withdrawal of EIS Income Tax reliefs. The new holding will qualify for EIS relief only if it is new shares in a qualifying company.

This offers a potential opportunity because currently a traditional ISA will form part of an individual’s estate for Inheritance Tax purposes on death. The main difference with most AIM shares is that will qualify for Business Property Relief (BPR). This means that as long as an individual holds the shares for at least two years, at the time of their death, the investment is outside their estate for Inheritance Tax purposes.

Whilst our view is that AIM stocks are very high risk, this is still an interesting development in relation to Investment and IHT planning.

For more information Talk to Ted on 07484 138682

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EJ Financial Limited • 2nd Floor • Johnsons Building • The Broadway • Crowborough • East Sussex • TN6 1DE

07484 138682

EJ Financial Ltd. Registered in England and Wales No 9370740
EJ Financial Ltd is authorised and regulated by the Financial Conduct Authority No 670594

The Financial Conduct Authority does not regulate taxation and trust advice.

The value of your investment can go down as well as up and you may get back less than you have invested.

The information contained within the website is subject to the UK regulatory regime and is therefore primarily targeted at customers in the UK.

NOTE: None of the above constitutes advice, always consult a professional adviser before making any investment decisions.

Please talk to Ted on 07484 138682 for further information.

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