Advanced IHT Mitigation: Trusts, Business Reliefs, and More

Beyond basic gifting, several more advanced strategies can be employed to mitigate Inheritance Tax (IHT). These often involve more complex structures like trusts or leveraging specific property reliefs.

Trusts as an IHT Mitigation Tool:

Trusts can be powerful tools for estate planning, allowing you to transfer assets out of your estate while retaining some control or specifying how they are managed for beneficiaries:

• Gift Trusts (e.g., Discretionary Gift Trust, Bare Trust):

    ◦ You place assets into a trust, transferring legal ownership to trustees for your chosen beneficiaries.

    ◦ If the trust is set up as a Potentially Exempt Transfer (PET) and the settlor (the person creating the trust) survives for 7 years, the assets within the trust can become IHT-free.

    ◦ Importantly, growth within the trust is outside your estate immediately.

    ◦ Key Considerations: These are complex structures that require professional advice. There can also be potential IHT charges on creation, 10-year anniversaries, and when assets are distributed (for discretionary trusts).

• Loan Trusts:

    ◦ You loan money to trustees, who then invest it.

    ◦ The growth on the invested money is immediately outside your estate.

    ◦ Key Consideration: The original loan itself remains part of your estate for IHT purposes, although it can be repaid to you, providing access to funds.

• Discounted Gift Trusts (DGTs):

    ◦ You gift a lump sum to trustees in exchange for regular payments (an annuity) for life.

    ◦ This strategy offers an immediate IHT reduction because the discounted value of the gift leaves your estate immediately. The full value (less payments already received) is outside your estate after 7 years.

    ◦ Key Considerations: The discounted value is calculated based on your age, health, and the level of payments you receive. A key drawback is that you have no access to the capital after the initial gift, other than the agreed-upon payments.

Business Property Relief (BPR) and Agricultural Property Relief (APR):

These reliefs are designed to reduce the IHT liability on specific types of assets, encouraging investment in businesses and agriculture:

• Business Property Relief (BPR):

    ◦ Available on qualifying business assets, such as shares in unquoted trading companies.

    ◦ Can provide 50% or 100% relief, reducing the value of the asset for IHT purposes.

    ◦ Key Changes: From 6 April 2026, 100% relief will be limited to the first £1 million, with 50% relief applying thereafter.

    ◦ Key Considerations: There are strict qualifying conditions regarding the nature of the business (must be trading) and the ownership period.

• Agricultural Property Relief (APR):

    ◦ Available on qualifying agricultural land and buildings.

    ◦ Provides 50% or 100% relief, reducing the asset's value for IHT.

    ◦ Key Changes: Similar to BPR, from 6 April 2026, 100% relief will be limited to the first £1 million, with 50% relief thereafter.

    ◦ Key Considerations: Strict qualifying conditions apply, including agricultural use and ownership/occupation periods.

Other Important IHT Mitigation Strategies:

• Onshore Bonds (Combined with a Trust):

    ◦ An onshore bond is an investment wrapper structured as a life insurance policy, investing in various underlying assets.

    ◦ When combined with a trust, an onshore bond can help reduce potential IHT, allow investments to grow more efficiently, and ensure wealth is passed on in a structured way.

• Life Insurance (Written in Trust):

    ◦ A life insurance policy specifically designed to pay out a lump sum that can cover a potential IHT liability.

    ◦ The payout is exempt from IHT because it is written into a trust, meaning it is paid directly to beneficiaries and does not form part of the deceased's estate.

    ◦ Key Consideration: The premiums paid for the policy are considered gifts, so you need to consider if they fall under normal expenditure or annual exemptions.

• Spouse/Civil Partner Exemption:

    ◦ Transfers of assets between spouses or civil partners (whether during their lifetime or on death) are 100% IHT-exempt.

    ◦ Additionally, any unused Nil Rate Band (NRB) and Residence Nil Rate Band (RNRB) from the first spouse/civil partner to die can be transferred to the surviving partner.

    ◦ Key Consideration: While this delays IHT, the recipient's estate may then be subject to IHT on these combined assets upon their death.

• Making a Will:

    ◦ While not a direct IHT relief, a clearly drafted Will is an essential foundation for any IHT planning.

    ◦ It allows for the strategic use of exemptions (e.g., ensuring assets pass to exempt beneficiaries like a spouse or charity) and maximises the use of your NRB/RNRB.

Implementing these advanced strategies often involves legal and financial complexities. It's crucial to seek professional advice to ensure they are set up correctly and align with your specific circumstances and goals.

It is important to note that the strategies set out above will not be suitable for all clients and the value of your investment may go down as well as up. Taxation is based on current legislation which is subject to change and will also depend on the individual circumstances of each investor. The value of your investments can fall as well as rise and investors may not get back the full amount they initially invested.  The FCA does not regulate tax advice.