THIS SCENARIO IS FOR ILLUSTRATIVE PURPOSES ONLY
THE CHALLENGE
Cassandra is 81 and divorced. She has already begun planning for inheritance tax (IHT), but her financial adviser recently told her that the size of her estate means it does not qualify for the residence nil-rate band (RNRB). However, the nil-rate band (NRB) of £325,000 is available. She is therefore keen to carry out further estate planning to lessen the IHT due on her estate.
- Cassandra’s estate is valued at £2.35m, including her home which is valued at £500,000. As the RNRB is tapered for estates worth over £2m, it cannot be claimed. She plans to leave her entire estate to her children.
- Cassandra has a whole-of-life policy worth £100,000 which has been written into trust. She invested £350,000 into Business Relief (BR)-qualifying shares more than three years ago, and also made some monetary gifts to her children over seven years ago.
- The £175,000 of relief that is available through the RNRB is tapered by £1 for every £2 that her estate is worth over £2m, meaning that she doesn’t qualify. Even though her BR-qualifying shares are exempt from IHT, they still form part of the calculation of the size of her estate.
- As a result, the potential IHT liability on Cassandra’s estate when she dies will be £670,000.
A POTENTIAL SOLUTION
Cassandra’s financial adviser recommends that Cassandra settles the £350,000 of BR qualifying shares into a discretionary trust.
- Cassandra is no longer considered the legal owner of the BR-qualifying shares as they now belong to the trust.
- As the shares have already qualified for BR, they will not use up any of Cassandra’s available NRB or create a Chargeable Lifetime Transfer (CLT).
- Provided the trust continues to hold the BR-qualifying shares, they will still be exempt from IHT should Cassandra pass away within seven years.
- Cassandra’s personal estate is therefore valued at £2m, meaning her estate is eligible to claim the full RNRB value of £175,000, which can be used against her main residence as she plans to leave it to her children.
- If Cassandra goes ahead with her adviser’s recommendation, the IHT liability on her estate should be reduced from £670,000 to £600,000.
This is a hypothetical estate planning scenario. It is provided solely for illustrative purposes and does not constitute tax planning advice. It is based on the tax rules as at April 2024 which could be subject to change.
Important Information - On 30 October 2024, the government announced changes to inheritance tax in its 2024 Autumn Budget. One of the changes was that, from April 2026, qualifying holdings in privately owned companies will be eligible for a £1 million allowance providing 100% relief from inheritance tax. Any qualifying holdings over £1 million will be eligible for 50% relief (Autumn Budget 2024, Section 2.51, October 2024). Applicants should seek professional advice to understand how this reform could affect their inheritance tax planning once the reform comes into force.
For simplicity, this illustration does not take into account investment growth or charges for either investment. It is assumed that the NRB and RNRB have already been used. Tax rules and reliefs are subject to change and the availability of Business Relief depends on the company in which the investment is arranged establishing and maintaining its tax status. The availability of tax reliefs for investors will also depend on their personal circumstances.