The Chancellor’s “big freeze” means more of us are set to be caught by Inheritance Tax

12 February 2013

This week’s decision by the Chancellor to freeze the Inheritance Tax threshold at £325,000 until 2019 marks the latest policy climb down by the Government. The Conservatives pre-election pledge had been to raise the limit to £1 million which at the time the policy launched was widely credited with persuading Gordon Brown to call off an early election. Now the Chancellor has signalled that the allowance will be frozen for the next five years in order to finance social care, tightening the net.

David Smith, Certified Financial Planner, at wealth management group Bestinvest, comments:

“There is an old saying that the few certainties in life are death and taxes and these two come together in the form of Inheritance tax. IHT, or ‘death duties’, have always aroused deeply divided opinions with some arguing inherited wealth undermines social mobility and others viewing inheritance tax as tantamount to grave-robbery. These taxes, originally aimed at those with very substantial wealth, have progressively drawn in more and more people thanks to rising property prices, particularly in London and the South East, so IHT is going to be problem for many people who are unlikely to regard themselves as wealthy at all.”

“While there are ways to immediately mitigate a potential IHT liability, for example by making annual gits of up to £3,000 and, or, regularly contributing towards grandchildren’s school fees from ‘excess income’, the majority of methods, such as establishing trusts for grandchildren, only become fully exempt from IHT if you live for a further seven years.

“There are also more esoteric options available, for example by investing in portfolios of Enterprise Investment Scheme or qualifying AIM shares which are exempt from an estate after being held for two years under Business Property Relief. However, these carry high levels of risk and require liquid assets to make the investment, so while useful for some wealthy investors they will have limited appeal for those whose wealth is principally tied up in their home. We caution against those tempted by overly ‘clever’ IHT mitigation strategies which attempt to find loopholes as the HM Revenue & Customs is taking an ever more robust approach to challenging and closing these down and the fees can be very high.”

Smith concluded: “While the prospect of seeing a large slice of your estate being swallowed up in tax is far from alluring, it is important to keep a sense of perspective. In particular there is a fine balance to be achieved in how far ahead you should start planning to mitigate a potential IHT liability. Life expectancy has increased significantly over the last half-century so many of us will now live well beyond our 80s meaning we need to be able to fund ourselves through many years of retirement. If you start giving your money away too early to mitigate IHT, you could find you struggle to fund your lifestyle in your twilight years. You need to put your interests first and foremost. For those who feel unable to gift assets then there is the option of taking out an insurance policy to cover some or all of a future liability. The proceeds of a ‘whole of life policy’ written under Trust will pass straight to the beneficiaries, assisting them with the payment of the IHT liability.”

- ENDS -

Notes to Editors:

What are the common tactics used to mitigate IHT?

Insuring the inheritance tax liability – this doesn’t limit the amount of IHT payable but gives individuals who are unwilling/unable to gift assets the ability to take out insurance to cover some/all of their IHT liability. In essence a ‘whole of life policy’ is affected under Trust which enables the proceeds to bypass the Estate and pass straight to the beneficiaries. The beneficiaries can then use the insurance policy proceeds to assist with the payment of the IHT liability.

Discounted Gift Plans – these plans are ideal for individuals who are willing to give up access to their capital but need to receive regular distributions from this capital. Under such plans a lump sum is invested and a proportion of this typically, immediately, falls outside of the Estate for Inheritance Tax purposes; the exact amount is dependent upon age and health and is calculated in line with HMRC guidelines. The remainder of the investment falls outside of the Estate after 7 years. The benefit of this plan is that it will provide monthly payments to the individuals for as long as the investment has sufficient value to fund them, which with good planning should be for life.

AIM Share Portfolios - unquoted shares of trading companies benefit from 100% relief from Inheritance Tax provided the shares have been held for two years or more at the time of death. This is because such investments are subject to Business Property Relief (BPR), a tax relief introduced by the UK government in 1976 to incentivise investment in a trading business. Whilst attractive from an Inheritance Tax saving perspective, AIM share portfolios are fraught with risk and are therefore unsuitable for the majority.

Other Business Property Relief Schemes – there are various other investments that take advantage of Business Property Relief that facilitate the investment falling outside of the estate after 2 years. Many of these schemes are significantly lower risk than AIM schemes as they are frequently asset backed (i.e. invest in children’s nurseries, pubs etc.) and/or offer protection against the investment falling – typically by up to 20%.

Which tactics are not permitted?

    • It is not permissible to gift an asset and continue to enjoy its benefit, for Inheritance Tax purposes


  • It is not possible to sell an asset at a discount to try and reduce Inheritance Tax, as the actual market value will be used for the purposes of calculating the value of the estate.

What are the rules at the moment?

    • Up to £325,000 of an individual’s estate will potentially be exempt from Inheritance Tax and any unused allowance can be passed to a surviving spouse, giving a total potential allowance of £650,000.


    • Any excess above the available ‘nil rate bands’ will be subject to Inheritance Tax at 40%.


    • A reduced rate of 36% will be applied if you leave at least 10% of assets to charity.


    • Transfers between UK domiciled spouses are exempt from Inheritance Tax.


    • Each individual can gift up to £3,000 per tax-year for Inheritance Tax purposes.


    • Any unused gift allowance can be carried forward to the following tax-year.


    • Gifts up to £250 to any person per tax-year are exempt from Inheritance Tax.


    • Making regular gifts out of normal expenditure are a useful method of reducing Inheritance Tax


  • Gifts to charities and political parties are exempt from Inheritance Tax.

Important information
The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Tax rates and reliefs are subject to change and individual circumstances. Some tax shelter schemes utilise high risk investments and are only suitable for investors that meet certain wealth criteria.

About Bestinvest:
Founded in 1986, Bestinvest was a pioneer of helping clients reduce the costs of investing through discounting commissions. Today Bestinvest has grown into a leading private client adviser which helps over 50,000 investors. Bestinvest offers a range of services including guidance, investment advice, financial planning and discretionary portfolio management all of which are underpinned by a commitment to rigorous investment research. Through its low cost Select service, Bestinvest offers execution-only investors a Self-Invested Personal Pension Plan (SIPP), Individual Savings Account (ISA), Junior ISA (JISA) and Investment Account with access to more than 2,000 funds as well as investment trusts, shares and Exchange Traded Funds. Bestinvest has won numerous awards including ‘Self-Select ISA Provider of the Year 2011’ and ‘UK Wealth Manager of the Year 2011’ as voted by readers of the Investors Chronicle and Financial Times and Investment Adviser of the Year 2012 at the Professional Adviser Awards. Headquartered in Mayfair, London, Bestinvest has 14 regional offices with 200 staff servicing clients with over £4 billion of assets.

About Tilney

Tilney is a leading investment and financial planning group that builds on a heritage of more than 180 years.  Our clients are private investors, charities and professional intermediaries who trust us with over £23 billion of their assets. We offer a range of services including financial planning, investment management and advice and, through our Bestinvest service, a leading online platform for those who prefer to manage their own investments.

We have won numerous awards. Tilney has been awarded Best Conventional Advisory Service at the 2018 City of London Wealth Management Awards, Best Advisory Service in the 2015 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. Bestinvest was voted Best SIPP Provider and Best Fund Platform at the 2017 City of London Wealth Management Awards, Best Direct SIPP Provider at the Awards 2017, Best Stocks & Shares ISA Provider at the 2017 Shares Awards, as well as Best Self Select ISA Provider, Best Online/Execution-only Stockbroker and Best Investment Platform 2017 at the FT and Investors Chronicle Investment and Wealth Management Awards, as voted by readers of the FT and Investors Chronicle.

Headquartered in Mayfair, London, the Tilney Group employs over 1,000 staff across our network of 30 offices, enabling us to support clients with a local service throughout the UK.