Terminology explained

Nil Rate Band (NRB)

The Nil Rate Band is the threshold up to which no IHT is charged on an individual's estate, set at £325,000 and is frozen at this threshold until 2030. Estates valued up to this amount are taxed at 0% IHT, while the excess is taxed at 40%.

Trust

A Trust is a legal arrangement where assets are managed by one party for the benefit of another. Trusts can be used to reduce potential IHT liabilities as well as controlling and protecting family assets.

Discretionary Trust

A Discretionary Trust is a legal arrangement where trustees have full discretion on how and when to distribute assets to beneficiaries. This type of Trust is useful for managing assets on behalf of beneficiaries who may not be ready or able to handle their financial affairs.

Chargeable Lifetime Transfer (CLT)

Chargeable Lifetime Transfers involve gifts made during an individual’s lifetime that are immediately taxable under IHT, most commonly transfers into Discretionary Trusts. These transfers may attract a 20% IHT on amounts exceeding the donor’s Nil Rate Band.

Scenario background

Elizabeth

• Elizabeth is 80 years old and widowed. Her late husband’s full Nil Rate Band was used following his death.

• She has an estate worth £500,000 outside of her home and would like to pass this wealth on to her grandson. However, she’s concerned about her grandson divorcing and wants to make sure her assets pass to her own family.

• Elizabeth talks to her adviser about her estate planning options. While she likes the control that comes with settling assets into a Trust, she’s concerned about the charges and a potential Inheritance Tax (IHT) liability if she dies within seven years.

• Her adviser discusses the option of using Business Relief (BR) to complement a Trust and she also takes further tax and legal advice. Elizabeth confirms she is happy to take on the higher risk associated with BR-qualifying investments.

The examples below shows how Elizabeth can use both BR and a Trust to meet her main objectives: estate planning and protecting her family.

Please note, this is an example only. Capital is at risk and returns are not guaranteed.

Option 1

Settle £500,000 into a Trust

• The first £325,000 is set against Elizabeth’s Nil Rate Band.

• The next £175,000 is subject to a 20% Lifetime Transfer Charge (£35,000).

• If Elizabeth dies within seven years, there is a potential IHT liability of up to a further 20% (£35,000).

• Total potential tax liability and charges: £70,000.

Option 2

Use both BR and a Trust in estate planning

• Invest £500,000 into the Downing Estate Planning Service; after two years Elizabeth’s shares should qualify for IHT relief (if held at death).

• After two years, Elizabeth places her BR- qualifying shares into a Discretionary Trust.

• There is no Lifetime Transfer Charge and Elizabeth can utilise her Nil Rate Band for other assets.

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Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment or tax advice.

Important notice: This article is for investment professionals only. This article is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment of tax planning decision.

This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.

Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing LLP as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.

Please note: The explanation of the 2024 Autumn budget changes is in accordance with our understanding of the law and our interpretation of it at the time of publication. The proposed reforms we will discuss have not yet been drafted in legislation; and are subject to change.