Inheritance Tax Planning at the 11th Hour

Most inheritance tax (IHT) planning requires a time window of at least 7 years, for it to become effective. Sometimes, due to health reasons, you may not have that luxury.  In these circumstances, however, there is still some IHT planning that can be actioned, that will be effective quicker:

Effective After 2 Years

• Invest in family business. Up to 6 April 2026, certain family business assets attract 100% business property relief (BPR) from IHT after two years’ ownership. It is sometimes possible to invest equity (including redeemable preference shares) in the trading business (eg using spare personal cash or converting a directors loan account balance or selling the personally owned business premises) to shelter this value from IHT. After 6 April 2026, for eligible assets over £1m the BPR relief is restricted from 100% to 50%.
• Invest in IHT friendly investments. Certain other holdings, including shares in AIM, EIS, and SEIS, together with woodland and UK agricultural land, are also entitled to BPR.

No Minimum Qualifying Period

• Invest further in family business, if shares already held and qualifying for BPR relief.  If you are already entitled to 100% BPR on your interest in the family trading business, it is sometimes to invest further and short cut the normal 2 year rule  (by structuring as a rights issue).
• Preserve BPR Entitlement. Consider improving the BPR position on the family business, by:
  • Splitting (ie removing or demerging) any investment assets/activities that unduly taint the “wholly or mainly ” BPR trading test.
  • Using any surplus cash in the business for business purposes, eg: spending on premises, growth, etc
  • Cancelling any binding contracts to buy/sell shares upon death.
• Will. Make sure you have a (tax efficient) Will and that it is up to date (as UK intestacy rules may result in an undesirable IHT outcome). At the same time, drawing up and registering a Lasting Power of Attorney is best practice to look after your interests in the event that you lose capacity to make decisions yourself.
• Get married (or enter into a civil partnership). If you intend to leave your estate to your long term partner, there will potentially be a charge to IHT on your death – and, again, on their death when assets are left, say, to your children. If you marry him/her, the whole of your estate, however large, will pass to him/her tax free on your death (the spouse exemption) even if you die within days of the marriage.
• Use your annual exemptions. You can give away £3,000 per annum, tax free (£6,000 if you haven’t used last year’s exemption). There’s no required survivorship period.
• Continue pattern of making lifetime gifts out of income. Lifetime gifts to another individual are exempt from the 7 year add-back rule if they form part of a person’s regular expenditure out of their surplus income and a regular pattern of giving has been established (eg to cover grandchildren’s private school fees).
• Care with legacies in Will. Make sure your Will leaves your main residence to a direct descendant, if you want to increase your nil rate band by the residence nil rate band.
• Pension pot. Depending upon your age relative to 75 at death and the type of pension, prior to 6 April 2027, some pension schemes upon death can be passed on to beneficiaries free of inheritance and other taxes. This gives the potential opportunity to make large (top-up) contribution to shelter spare cash, that might otherwise be exposed to a 40% IHT charge. But beware of HMRC restrictions. It also gives scope, where eligible, to stop drawing an income from pension funds and to start living off cash capital reserves instead. Converting income drawdown to an annuity should also be considered.
• Make gifts to take your remaining estate below £2 million.  The estates of a married couple, on the second death, may benefit from a total nil rate band of £1 million, provided the estate contains a home, which is to be bequeathed  (or the proceeds of sale of a home if the couple/survivor had downsized or, perhaps, sold up and moved to a nursing home) to direct descendants–  and the estate is worth less than £2 million. So last minute gifts will not be effective under the 7 year rule, but they might secure entitlement to an additional £350k of residence nil rate band IHT exemption and hence save £140k of IHT.
• Share discounts. Consider whether any gifts of shares in the family business will reduce death shareholding to below critical thresholds (75%, 50% & 25%), whereby minority holding discounts increase to deflate the value.
• Wash out spouses’ CGT paper gain. If your spouse holds any assets (shares or property) pregnant with a ‘paper’ capital gain, consider gifting them to you (at CGT no gain no loss price) before leaving them back to your spouse (at a rebased cost) in your Will. Care will be needed if any of these holdings has tax advantaged status, eg a BES subscription.

Post Death

• Sale at a Loss.  Inheritance tax is payable based on the assets in the estate valued at the date of death. Where these assets are subsequently sold at a lower value (shares within 12 months of death and property within 4 years of death) then a refund can be claimed.
• Replacement Relief.  Where IHT is due on a failed PET, because a gifted business asset is no longer held by the recipient at the date of a donor death within 7 years of the gift, the recipient has 2 years to reinvest the value in a ‘replacement’ business asset (eg AIM shares).
• Deed of Variation.  Even if a Will cannot be amended before death, do not forget that a deed of variation can be made up to 2 years after death if all the beneficiaries agree, to change the distribution of the estate (eg to distribute the main residence to a direct descendent, so that residence nil rate band can be claimed).
• Cash Flow. Instead of paying inheritance tax 6 months after death, for certain assets you can instead elect to pay in instalments over 10 years.

As with all tax planning, please seek professional advice from one of our tax advisers before considering actioning any of the above ideas.