Estate planning – the basics

Estate planning – the basics

Photo by Tierra Mallorca on Unsplash

Whether you’re starting to think about your wealth and inheritance tax (IHT) or possibly trying to assist older relatives in this process, before you or they make any big decisions it’s worth reminding yourself of the basics.

The first £325,000 of a person’s estate is not subject to IHT, and this is known as the nil rate band.

From April this year, an additional £175,000 (as opposed to £150,000 currently) of nil rate band is available for property owners who pass their main residence, or a share of the property, on death to direct descendants.  This is known as the residential nil rate band (RNRB).  The rules around this are highly complex and the additional relief is withdrawn at a rate of £1 for every £2 by which the estate’s value exceeds £2m.  In 2020/21 this additional RNRB will not apply to estates over £2.35m.

Married couples and civil partners may carry forward their deceased spouse or civil partner’s unused nil rate band, with the amount of the nil rate band determined by the exemption applicable at the time of the second death.  So, even if the deceased spouse/partner died when the nil rate band was lower than the £325,000 it is today, if none was used on first death a total of £650,000 would be available on second death.  This carry forward also applies to the RNRB.  In a similar way it is the unused percentage of the RNRB from the estate of the first to die which can then be claimed on the second death.

Everyone has an annual gift exemption of £3,000 which is immediately exempt from IHT, plus £3,000 if not used from the previous tax year.  Any unused exemption can be carried forward for one year but it must be used after the £3,000 exemption for that year.  So if these have not been used before, a couple can gift £12,000 in the first tax year and then £6,000 each tax year thereafter.

Gifts in consideration of marriage are immediately exempt from the donor’s estate: from parents £5,000, from grandparents £2,500 and from anyone else £1,000.

Outright small gifts of up to £250 in total per gift to any number of people in one year are exempt from IHT.  Not much but as one supermarket chain likes to say ‘every little helps’.

Regular gifts which meet, or are intended to meet, the definition of being from ‘normal expenditure out of income’ are immediately exempt, whether they are paid to a trust or an individual.  These should be documented at outset in case the donor does not survive beyond the first gift.

The estates of members of the armed forces whose death can be attributed to, or was hastened by, injury or illness suffered whilst on active service or other service of a warlike nature are exempt from IHT.  This exemption has also been extended to members of the emergency services and humanitarian aid workers responding to ‘emergency circumstances’. However, it is the responsibility of the deceased’s estate to make such a claim.  It is important to note that the injury or illness may have occurred many years prior to death.

There is also an exemption for medals and other decorations awarded to armed forces or emergency services personnel for valour or gallantry, and also to awards made by the Crown for achievements and service in public life, provided that they have not been purchased by the owner.

Qualifying business or agricultural assets benefit from business or agricultural relief (BR or AR) and are exempt at the rate of either 50% or 100%.

Loans are deductible from the deceased’s estate for IHT calculation purposes as long as they are actually repaid on death and have not been used to acquire, enhance or maintain excluded property (property situated outside the UK and held by a non-UK domiciled person or settled into a trust by such a person) or for loans taken out after 6th April 2013 (or whose terms have changed after that date) where they were used to acquire assets already subject to IHT relief (such as BR or AR).

Gifts made to registered charities or qualifying political parties in lifetime or via a will are immediately exempt from IHT.  If at least 10% of an individual’s taxable estate is left to a registered charity via their will, then the residual IHT liability is reduced by 10%, i.e. from 40% to 36%.

So before you rush into an IHT based scheme or package IHT solution, remember to consider the basics first and think about the straight forward use of all these exemptions and reliefs.  If you still have a potential IHT problem or just want to start considering wealth transfer my advice would be to speak to a financial planner.

You can find further details on estate planning in our Guide to Estate Planning which is free to download at –