Top planning tips for Inheritance Tax

We’ve put together our top planning tips for Inheritance Tax and how you can reduce your IHT and protect your assets.

Live 7 years!

If you give assets away and survive 7 years then there will be no IHT on these assets. These are called Potentially Exempt Transfers or “PET’s”. If you die before the 7 years are up, then the value of these gifts will be brought back into the estate for IHT purposes.

Gifts made within 3 years of death are taxed at the normal 40% rate, however earlier gifts attract reduced rates.

This is shown in the table below:

Gift made withinValue of gift brought into estateEffective IHT rate
Less than 3 years of death100%40%
3 to 4 years of death80%32%
4 to 5 years of death60%24%
5 to 6 years of death40%16%
6 to 7 years of death20%8%

Planning point – If you think IHT will apply then it makes sense to give away assets earlier as you are more likely to survive 7 years. For example, if you are in your eighties then surviving 7 years might be trickier than if you were in your fifties!

Make regular gifts

Each year an individual can give away a certain amount (known as an annual exemption) which is exempt from IHT, even if you die within 7 years of making the gift. The current exempt amount is £3,000 per person per year.

You can also use the prior year’s £3,000 exemption if you made no gifts in that year.

Planning point – the annual exemption lends itself to assets which can be handed down gradually over time, such as cash or shares in quoted and unquoted companies.

If your children get married, you can give each child £5,000 as a wedding gift exempt from IHT. You can also give £2,500 to each grandchild or £1,000 to anyone else on their wedding. This wedding allowance is in addition to the £3,000 annual exemption.

You can also give away small gifts under £250 each to any number of people and these will be exempt from IHT. You can also make regular gifts out of your income, as long as they do not affect your normal standard of living. This is known as “normal expenditure out of income”. No specific limit is placed on this; what is important is that the gift is made from income (you gift some of your pension income) and that you can maintain your usual standard of living after the gift. If you have a large amount of income each year, then this gives scope to make some large gifts free of IHT.

If you are considering this, you should take specific advice as these rules are complex.

Business Property Relief

Business property relief (BPR) allows a business (irrespective of its value) to be passed on to the next generation free of IHT.

There are six types of business property which qualify for BPR:

1. A business or interest in a business (100% relief)
2. A controlling shareholding in an unquoted company (100% relief)
3. A minority shareholding in an unquoted company (100% relief)
4. A controlling shareholding in a quoted company (50% relief)
5. Land, buildings, machinery or plant used in a business carried on by a company controlled by you or by a partnership in which you are a partner (50% relief)
6. Land, buildings, machinery or plant which you have an interest in possession and used in your business (100% relief if transferred with the business, 50% if not).

In general, you must have held the business property for at least two years prior to death to qualify for the relief.

BPR is not available in the following circumstances:

  • Where the business consists of dealing in securities, holding investments or dealing in land
  • Where the property transferred is subject to a binding contract for sale
  • Where the shares are in a company in liquidation
  • Where the assets are not used wholly or mainly for business purposes
  • Planning point – given that business property is largely exempt from IHT, it is normally recommended that you hold onto it until death so that you benefit from the relief. For example, if you sold your business during your lifetime, the cash you receive will not be covered by BPR and will be subject to IHT.

    Agricultural Property Relief

    Agricultural Property Relief (APR) works a bit like BPR in that it grants either a 100% or a 50% exemption agricultural property (buildings and land only) from IHT.

    However, APR only applies on the agricultural value of the asset which is often lower than the market value.

    You can generally qualify for APR via two routes:
    1. By personally using land for agriculture for the two years prior to death, or
    2. By owning land used for agriculture by somebody else for seven years prior to death.

    The APR rules are complicated, so if you own agricultural property you should obtain further specific advice.

    Need help with Inheritance Tax?

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