Mark McLaughlin points out that although forward planning is always better, ‘last minute’ and even post-death inheritance tax planning may be possible in some cases.
Death and taxes are supposedly inevitable. However, steps to reduce the possible inheritance tax (IHT) burden on death might be considered.
What can be done?
The following is a selection of steps to consider for reducing the tax burden during lifetime, or possibly even post-death.
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Annual gifts – Transfers of value (e.g., gifts) are generally exempt from IHT up to a maximum of £3,000 per tax year. Any unused annual exemption can be carried forward to the following tax year (but not beyond).
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Nil-rate band – Every individual is entitled to an IHT threshold (or ‘nil-rate band’). Where chargeable lifetime gifts (and the individual’s death estate) do not exceed the nil-rate band (£325,000 for 2025/26), there is no IHT liability.
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Gifts at seven-year intervals – If an individual gifts an asset to another individual, the gift is generally a ‘potentially exempt transfer’ (PET), which generally becomes exempt from IHT if the donor survives for at least seven years (whereas if the individual dies within seven years of making a PET, IHT becomes due at the ‘death rate’ (40% for 2025/26) to the extent that the gift’s value exceeds the IHT nil-rate band). Therefore, consideration could be given to making gifts every seven years or more (although most gifts between spouses or civil partners are exempt from IHT in any event).
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Get the spouse (or civil partner) involved! – IHT savings may be doubled if married couples (or civil partners) each take the above steps; substantial combined IHT savings can be achieved over a relatively short period of time.
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Where there’s a will – An individual’s will could leave assets on discretionary trusts. Distributions from the will trust within two years of death are treated as made under the will. This may not necessarily save IHT (unless the distribution is to an exempt beneficiary, such as a surviving spouse), but it allows up to two years to consider which beneficiaries should benefit (and to what extent).
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Too late? Not necessarily! – If there is no time to prepare a new will, consider the planning possibilities available for up to two years after death through a deed of variation of the will (under IHTA 1984, s 142).
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Over to you! – If the healthier spouse (e.g., the wife) has chargeable assets showing large capital gains, they could be transferred to the other spouse during lifetime to obtain a new base value for capital gains tax (CGT) purposes on his death, and they can return to the donor exempt from IHT under his will (but a note of caution – this approach could be challenged by HMRC as an ‘associated operation’. Whilst death itself is not an associated operation, HMRC’s view in its Inheritance Tax Manual at IHTM14826 is that the making of a will can be). The ailing spouse could also leave his other assets to the surviving spouse, thereby obtaining IHT exemption and a CGT market value uplift. Thereafter, the surviving spouse could consider making PET gifts to family members.
Practical tip
Other IHT reliefs and exemptions (e.g., for ‘normal expenditure out of income’) could also be considered, as appropriate. Where assets are being given away instead of cash, other taxes (e.g., CGT) may need to be addressed. Remember that IHT (and other tax) mitigation should never take precedence over personal circumstances and financial needs.
