Is it right to avoid inheritance tax? And one of my favourite ways to mitigate it.

Is tax theft by the government? I think most people would concede that it isn’t, but rather a necessary means to provide protection of life, property and human intellect. You may think of some other benefits and I’d welcome your comments but in my opinion everything else is a subset of these three. Once we’ve conceded, we are then faced with further questions such as, what is a fair level of taxation? Who should pay it? How should it be paid? And when should it be paid?

If you’ve accumulated assets having already paid various forms of tax, is it then right to have those assets taxed again?

I was listening to Professor Ha-Joon Chang, a political economist at Cambridge University and he made an interesting point although it was in reference to corporate taxation, the principles are similar. You see companies receive an incredible amount of state subsidies in the form of funding the education for the very employees who end up working for them, the development of state infrastructure such as roads, rail, powerlines, broadband and through the provision of a healthcare system and a police force. Therefore, only because the latter is all in place can companies make the sales and profits that they do.

Can the same principles then be applied to assets citizenry own, especially property? Possibly. You see house prices don’t necessarily increase due to the activity of the owner of the property but rather policies of the government, and therefore, is the argument that the government takes a portion of that growth a reasonable one? In the UK, the inheritance tax rate on wealth above £325,000 (ignoring the residential nil rate band) is 40%. I’m not sure how they’ve come up with a figure of 40%, but it doesn’t feel like such policies have made a 40% difference on the growth of one’s asset from the date of purchase. Also note, inheritance tax is not a tax on gain, it’s simply a tax on wealth upon which tax has already been paid.

I accept there is merit in the argument for some sort of tax on death, I’m unsure as to whether 40% is a fair charge or whether it’d be fairer to continue to tax the capital gain on one’s assets on death in its stead.

On that note let’s talk about avoiding inheritance tax. Avoiding inheritance tax isn’t a legal problem, evading it is. Evading is when there’s an illegal non-payment or underpayment of inheritance tax, avoiding it, is when you structure your assets in such a manner your assets don’t fall into the inheritance tax regime to the same degree, thereby reducing your tax bill.

It’s important to know that all forms of legitimate inheritance tax avoidance require you to give up your absolute autonomy over such assets. Hence in my view legitimate inheritance tax avoidance is not immoral. Although I accept there are some interesting contrary views.

Inheritance tax is generally charged when there is a transfer of value and it’s usually charged on death. Now, if you were to gift an asset during your lifetime, it’s only deemed to be outside your estate provided you survive 7 years from making that gift. Should you die within those 7 years, the value of the gift is brought back into your estate and taxed accordingly.

Should you gift your asset to your spouse, a registered charity or even a political party, as they are classed as exempt beneficiaries there is no inheritance tax to be paid on that transfer of value.

Unfortunately, your children are not counted as exempt beneficiaries and therefore should they receive a transfer of value, an inheritance tax charge on that asset is to be paid.


Now there are several exemptions and reliefs offered by the government where the 7-year rule doesn’t apply and so when a transfer of value occurs it’s deemed to be outside of one’s estate immediately. They are:

  • gifts upto the annual exemption of £3,000 in each tax year (Section 19, Inheritance Tax Act 1984)
  • regular small gifts of upto £250 to multiple people in each tax year (Section 20, Inheritance Tax Act 1984)
  • normal expenditure out of income; provided there was a regular pattern, made from income and it didn’t affect one’s normal standing of living (Section 21, Inheritance Tax Act 1984)
  • gifts in consideration of marriage upto £5,000 to a child, £2,500 to a grandchild, £1,000 to any other person (Section 22, Inheritance Tax Act 1984)

The above exemptions are often paltry to the size of one’s estate and do little to mitigate the effects of tax immediately thereby leaving advisers to put in place more sophisticated strategies. There is, however, an area of legislation that’s oft forgotten which is found in Section 11 Inheritance Tax Act 1984.

This provision exists where one party of a marriage makes a gift to a dependent, such a person could be a spouse, child or relative. The gift is not deemed to be a transfer of value and so it’s deemed to be immediately outside the transferor’s estate.

Scenario 1

Consider the scenario of where there’s a minor child who has 10 years of full-time education remaining at a cost of £40,000 per year plus university fees of £20,000 per year for a 3-year course. Structured properly that could remove £460,000 out of the parent’s estate immediately.

What I’d be thinking is transferring the £460,000 into a discretionary gift trust, and due to Section 11, there wouldn’t be a chargeable lifetime transfer of 20% that is ordinarily charged on similar lifetime transfers. Should the parent die, that trust fund doesn’t form part of their estate for inheritance tax.

Scenario 2

Consider a second scenario involving a dependent elderly parent who needs live-in care, what I’d be thinking is to purchase a 2-bedroom property, of reasonable value, let’s say £325,000 for their parent which will also be occupied by the live-in carer. Under section 11, that purchase is not a transfer of value. It’s immediately outside of the adult child’s estate as the purchase is for a dependent relative i.e. parent.

Now, with appropriate wills and trusts in place for the parent, once that parent passes away, their property falls into appropriate trusts which do not fall (or return) to the estate of the child thus avoiding generational inheritance tax; that is successive charges of inheritance tax on the same wealth as it passes down generations.

Both scenarios require careful planning but are feasible. It’s also clear that the transferor needs to give up a degree of autonomy in order to mitigate the tax threat but when you’ve got a few hundred thousand as a potential liability it could be a worthy trade.


On a final note, I can’t stress the importance of diversifying your assets enough. Those with most of their wealth in property will have a difficult time in mitigating tax which may require liquidating their portfolios, taking riskier strategies involving equity release or specialist strategies involving limited incorporation with alphabet share classes (not a quick fix, often taking several years to structure properly)…but maybe I’ll write about that another day.

Should you like to explore your personal circumstances, complete the enquiry form below or book a call via the calendly widget below.

Mohammad Uz-Zaman is a private client trust and estate planning consultant who holds accreditations across regulated financial advice and estate planning. He holds graduate and post-graduate degrees and he is also a member of the Society of Trusts Estate Practitioners. He works closely with financial advisors from several major practices.

The case for inheritance tax – for and against

Jean-Baptiste Colbert, France’s celebrated 17th century finance minister under King Louis XIV, famously said the following: “The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing.” Or, to put it more bluntly, a successful tax should earn the government plenty of money whilst causing as little aggravation as possible to the people paying it.

Those who argue against the levying of inheritance tax (IHT) may or may not be aware of Colbert’s quote, but it’s very likely that they’ll agree with it. Opponents of IHT often say that it actually brings in a very small amount of money, an argument the statistics appear to back up: whilst annual receipts exceeded £5 billion for the first time earlier this year thanks to the boom in house prices, this only amounted to 0.25% of GDP. For the amount of ‘hissing’ the tax causes, is it really worth it for such a small percentage of the government’s revenue? Those against IHT would say not.

In contrast, those who support IHT come at the issue from a different angle. Whilst the revenue percentage may be small, IHT still earns the government a sizeable amount of money which would need to come from elsewhere if it were abolished. Getting rid of IHT could therefore lead to greater taxation elsewhere, preventing people from being able to enjoy their hard-earned money during their lifetime. The existence of IHT can also be seen as a potential stimulant for the economy: if people know that tax will be paid at 40% on any money they leave behind, they’ll be more likely to spend it whilst they’re still alive.

The steps cohabiting couples should take when drawing up a will

There’s no denying the huge steps forward seen in creating equality for same-sex couples in the UK during the 21st Century, first with the Civil Partnership Act 2004 and then the Marriage (Same Sex Couples) Act 2013. However, as heterosexual couples have marriage as the only option open to them to make their relationship formal, there have been suggestions of a new inequality having now been created. A legal challenge by mixed-sex couple Rebecca Steinfield and Charles Keidan to be able to enter into a civil partnership instead of a marriage was unsuccessful earlier this year, meaning it’s unlikely the situation will change for heterosexual couples in the near future.

If a man and a woman in a relationship don’t want to marry, the only other option currently available to them is cohabitation. There are key financial implications for such couples, however, in particular those relating to inheritance tax (IHT). Whilst such couples might describe themselves or be described by others as being in a ‘common law marriage’, this is not a legal term and as such does not give them the same rights as those who are married or in civil partnerships.

Heterosexual couples in this situation must therefore make sure they have carefully planned every detail of what will happen should one of them die. Without a will in place, the death of one partner would result in intestacy rules coming into effect, which would mean the surviving partner would not be provided for, potentially leaving them in serious financial difficulty. Anyone cohabiting with but not married to their partner is therefore strongly advised to have a will in place which clearly lays out what should happen to their assets in the event of their death, as well as making plans for the IHT which is likely to be due.

It is also worthwhile cohabiting partners looking at any pension or life policies they may have, as well as the death-in-service benefits offered by their employers, to ensure any payments in the event of their death will go to the right person. Whilst spouses and civil partners are commonly recognised in all these cases, cohabiting partners are likely to lose out without a formal nomination.


The Only Certainties in Life? Death and Taxes.

Understanding what will happen to your money when you have died, is something that we all need to think about. As is often said: you can’t take it with you when you are gone. Unfortunately – dying and taxes remain the two things you can really expect, so for that reason alone, now is the time to think about how you or your children may be affected.

For many of us, inheritance tax is bit of a mystery and understandably so – it is perhaps something we would rather not think about. But getting your finances in order whilst you are fit and healthy will be the best thing you can do for your family in the event of your death.

Why do we have Inheritance Tax?

Inheritance Tax is never going to be popular – most of us feel that we have spent our lives working hard and being taxed and therefore should be able to leave our assets and savings to our family without losing any to fund others or the State. However, Inheritance Tax has been around for a long time and doesn’t show any real sign of going away, despite the promise of each Government to change it. Whilst it may have once been justified more easily as the wealthy were an exception, nowadays more and more people have worked and accumulated considerable savings and assets. For now though, Inheritance Tax looks here to stay and as such, the best thing we can all do is ensure we are managing our assets as efficiently as possible.

The details – in brief.

Inheritance Tax was once something that only the really wealthy had to think about. However, nowadays, most families will be liable for Inheritance Tax on some level, due mainly to rising property prices and changing legislation.

When you die, it is usual for most of us to wish to leave our finance and assets to our family members or friends.  By arranging your affairs now, you can be sure to pass your money and property on in the most efficient way possible and without losing more than is really necessary.

To date, if your estate is worth more than £325,000 your assets could be eligible for Inheritance Tax. This means that your wealth above this figure could be subject to 40% deduction before being passed on to your children. Married couples can combine their nil rate band to reach a £650,000 threshold but with rising property prices this is often easily breached.

However, changes coming into effect in April 2017 will see a family home allowance introduced which will be added to the existing tax-free allowance. This will mean that those who have no considerable assets other than the family home, will be able to pass the property to their children without fear of a huge cut in inheritance tax or losing their home altogether. Good news? Yes – but your remaining assets could still be eligible and your property can only be left to your direct family.

Sound complicated?

That’s because it is. Inheritance Tax is a very complex area which most of us would rather not become familiar with.


Disclaimer: The information contained within this article are provided as illustrative purposes only based on legislation at the time of publication. Nothing in this article should be construed as advice or guidance to one’s personal situation. The value of your investments may go up and down, similarly, other aspects of your wider lifestyle and financial context may impact on your objective. In a nutshell, don’t rely on blogs and the articles for personal advice, and always seek advice from a qualified professional.